Was a departing flying-club member's aircraft interest taxable when the remaining members paid for the share or assumed the member's debt?

Plain-English summary

A flying-club member left and relinquished an interest in both the club and its airplane to the remaining members. San Mateo Audit asked whether that change was subject to use tax.

If the member owned the interest outright and gave it up without payment or other consideration, no sale occurred and no use tax applied.

If the remaining members paid for the share or assumed indebtedness owed by the departing member, the transfer was a taxable sale subject to use tax. The memorandum said the aircraft exemption did not apply to an individual's sale of a co-ownership interest, even though ultimate ownership remained substantially similar after the transfer.

Audit question, consideration alternatives, exemption limits, and source gaps

Headquarters Legal, identified by the initials RLD, sent the internal memorandum to San Mateo Audit (HF) on June 30, 1981. It responds to a May 12 Mini Memo asking about a flying-club member who relinquished an interest in the club and airplane to the remaining members. The Mini Memo is not included, and the source does not identify the club, member, aircraft, transaction, audit, or whether the question was hypothetical or completed.

The first alternative assumed the retiring member owned the aircraft interest outright and simply relinquished it for no consideration. Headquarters Legal said no sale occurred and use tax did not apply. The second alternative assumed the remaining members paid for the share or assumed indebtedness owed by the retiring member. That consideration made the transaction a sale subject to use tax.

The Mini Memo also asked whether substantially unchanged ownership after the sale affected the result. Section 6281, as quoted, exempted use of aircraft when the aircraft was included in a transfer of all or substantially all property held or used in the seller's business activity and real or ultimate ownership remained substantially similar. The quote treated stockholders, bondholders, partners, and other entity-interest holders as the real or ultimate owners of entity property.

The memorandum said that exemption did not apply to an individual's sale of an aircraft co-ownership interest. Similar ultimate ownership therefore did not shelter the paid or debt-assumption transfer. The source does not analyze whether the flying club was an entity, whether the aircraft was business property, whether other property existed or transferred, what percentage the retiring member owned, or how the debt assumption and tax measure would be calculated.

A later editorial line says See also Reg. 1595. SPJ 7/11/01. It does not reproduce the regulation, identify a subsection, explain its application, or update the 1981 analysis. The PDF also contains the printed word ownerhip in its final substantially-similar-ownership sentence; this page follows the readable intended word without changing the preserved original text below.

The source omits the May 12 Mini Memo; club charter, bylaws, membership and ownership records; aircraft make, model, registration, title, location, use, basis, and value; member's payment and capital records; debt note, balance, obligor, lender, release, and assumption agreement; transfer date and instrument; consideration allocation; permits and returns; audit report and schedules; use-tax measure and payment; agency follow-up; appeal; and later outcome.

The live annotation preserves the club ownership, resignation, aircraft-interest relinquishment, outright-interest and no-consideration alternative, payment or debt-assumption alternative, and use-tax distinction. It describes assumption of the resigning member's “share of indebtedness,” while the supporting memorandum says more generally “an indebtedness owed by the retiring member.” The live text omits the May 12 Mini Memo and internal audit posture; section 6281 and its all-or-substantially-all-property and substantially-similar-ownership conditions; exclusion of an individual's co-ownership-interest sale; Regulation 1595 note; missing club, aircraft, debt, transaction, and audit records; source typo; and outcome gap.

What this means for you

Flying clubs and aircraft co-owners

Under this memorandum's alternatives, whether money or debt relief changes hands distinguishes a no-sale relinquishment from a use-taxable sale. Document indirect as well as direct consideration.

Accountants and tax professionals

Review payoff amounts, debt releases, capital-account adjustments, and any indirect consideration. Also test the statute's all-or-substantially-all-property condition; similar ownership by the remaining group did not by itself establish exemption here.

Common questions

Q: Was a no-payment relinquishment taxable?
A: No. Without consideration, there was no sale.

Q: What if the remaining members assumed the departing member's debt?
A: The debt assumption was consideration, making the transfer taxable.

Q: Did similar ownership after the transfer protect the sale?
A: No. The letter said the aircraft exemption did not apply to an individual coownership-interest sale.

Q: Which tax applied?
A: Use tax under the historical analysis.

Q: Did the source identify the aircraft or ownership percentage?

A: No. It provides no aircraft, title, registration, valuation, use, or ownership-share records.

Q: What did section 6281 require besides similar ultimate ownership?

A: The quoted language required the aircraft to be included in a transfer of all or substantially all property held or used in the seller's business activities.

Q: Did the source calculate the debt-assumption tax measure?

A: No. It gives no debt balance, assumption agreement, consideration allocation, or tax amount.

Q: Did the 2001 note supply a new result under Regulation 1595?

A: No. It only says “See also Reg. 1595” and does not identify a subsection or explain its application.

Citations and references

• California Revenue and Taxation Code § 6281
• California Sales and Use Tax Regulation 1595 — identified in a July 11, 2001 editorial note; subsection and text not included
• May 12, 1981 San Mateo Audit Mini Memo — identified but not included
• Club, membership, aircraft, ownership, payment, debt, transfer, tax, audit, and outcome records — described or implicated but not included

Verbatim support

From the official June 30, 1981 Headquarters Legal memorandum:

Of course, if the retiring member owned his interest in the aircraft outright and merely relinquished his share for no consideration, there would be no sale and, consequently, use tax would not apply.

However, we believe that where the remaining partners pay the retiring member for his share or assume an indebtedness owed by the retiring member, the transaction is a sale subject to use tax.

The exemption does not apply to the sale by individuals of their co-ownership interest in an aircraft.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.0828
• Original supporting opinion: 395.0828 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

San Mateo – Audit (HF)

From:

Headquarters Legal (RLD)

Subject:

Sale of an Airplane

395.0828

Date:

June 30, 1981

This is in reply to your May 12, 1981 Mini Memo wherein you asked whether use tax applies when a member of a flying club relinquishes his interest in the club, and in the plane, to the remaining members. Of course, if the retiring member owned his interest in the aircraft outright and merely relinquished his share for no consideration, there would be no sale and, consequently, use tax would not apply. However, we believe that where the remaining partners pay the retiring member for his share or assume an indebtedness owed by the retiring member, the transaction is a sale subject to use tax. You also ask if it would matter that after the sale, the ownership would be “substantially unchanged.” Section 6281, Revenue and Taxation Code, provides: “There are exempted from the taxes imposed by this part…the storage, use, or other consumption in this state of, …aircraft, when such property is included in any transfer of all or substantially all the property held or used in the course of business activities of the person selling the property, and when after such transfer the real or ultimate ownership of such property is substantially similar to that which existed before such transfer. For the purposes of this section, stockholders, bondholders, partners, or other persons holding an interest in a corporation or other entity are regarded as having the “real or ultimate ownership’ of the property of such corporation or other entity.”

See also Reg.
1595.
SPJ 7/11/01.

San Mateo - Audit

-2-

June 30, 1981
395.0828

The exemption does not apply to the sale by individuals of their coownership interest in an aircraft. Therefore, the use tax would apply to the sale of a coownership interest in an aircraft regardless that the ultimate ownerhip of the aircraft would remain substantially similar to that which existed before the sale. We hope this answers your question. If you need further information, feel free to call or write.

RLD:jw