Was a bankruptcy trustee's transfer of debt-encumbered equipment exempt, and did the same answer apply to registered vehicles?

Plain-English summary

A Chapter 7 corporation held equipment, including vehicles, whose debt exceeded value in most cases. Its trustee sought court approval to abandon the equipment. Two proposed methods would place title either first with the 80-percent shareholder-president and guarantor, who would contribute it to a new corporation, or directly with that corporation. In either route, the recipient would assume the debt.

The letter treated assumption of debt as consideration. But for equipment other than registered vehicles, the trustee's sale qualified as an occasional sale if the trustee had not made three or more substantial sales from that bankruptcy estate within 12 months.

Registered vehicles were different. The occasional-sale exemption did not apply; a purchaser buying from a nondealer owed use tax through DMV when registering the vehicle. If the trustee had made three or more substantial sales from this estate in twelve months, the trustee instead had to hold a seller's permit and report sales tax on the nonvehicle equipment.

Proposed structures, debt consideration, sale-count premise, and source limits

Senior Tax Counsel John Abbott wrote to J--- L. W--- on May 30, 1990. The lawyer represented P--- V---, the bankrupt corporation's 80-percent shareholder, president, and purchase-contract guarantor. Abbott quoted a February 20 request and relied on a May 3 telephone conversation, but the source omits the complete incoming letter, call record, and attached equipment list labeled Exhibit A.

The old corporation's redacted ownership was 80 percent for P---, 10 percent for R--- M---, and 10 percent for F--- I---. The new corporation would be owned 50 percent by P--- and 50 percent by R--- V---. The request said ultimate ownership would be slightly different and proposed either trustee abandonment to P--- followed by a contribution to the new corporation for shares under Internal Revenue Code section 351, or trustee abandonment directly to the new corporation.

Counsel reported by telephone that P--- had personally made the equipment-debt payments, the trustee would transfer title to P--- or the new corporation, and that recipient would assume the indebtedness. The lawyer believed the trustee had made no other sale in the bankruptcy proceeding. The source provides no trustee confirmation, sale ledger, court order, title record, debt instrument, lender consent, release, assumption agreement, or completed transfer.

Sections 6006 and 6051 supplied the rule for a retail sale of tangible property for consideration. Citing Cal-Metal Corp. v. State Board of Equalization, 161 Cal.App.3d 759 (1984), Abbott treated assumed debt as consideration included in the tax measure. Sections 6007 and 6051 addressed retailers, Regulation 1595(a) used three or more substantial sales in twelve months as a permit threshold, and section 6005 expressly included a bankruptcy trustee as a “person.”

The letter cites California State Board of Equalization v. Sierra Summit, Inc. as (1985) 109 S.Ct. 2228, 104 L.Ed.2d 910 for the constitutional ability to impose state sales tax on trustee liquidation sales. The reporter citations resolve to the named United States Supreme Court case filed June 12, 1989, not 1985. This page preserves the letter's printed year conflict and does not use it as the decision date.

For equipment other than vehicles, the sale to either P--- or the new corporation was exempt if the trustee had not made three or more substantial sales from this bankruptcy estate during twelve months. The source prints sections 6606.5(a) and 6367 for that conclusion even though it previously cites section 6006.5(a); it does not explain the extra 6.

Regulation 1595(c) excluded DMV-registered vehicles from occasional-sale treatment. Regulation 1610(c) placed use tax on the nondealer purchaser, payable to DMV upon registration. If the lawyer's trustee-sale belief was wrong, the trustee had to hold a permit and report sales tax on nonvehicle equipment. Section 6006.5(b)'s business-reorganization exemption would not apply. Abbott stressed that the taxed transaction was the trustee's sale, not the earlier movement of the bankrupt corporation's assets into the estate.

The PDF omits the full request, Exhibit A, Regulations 1595 and 1610 said to be enclosed, bankruptcy petition and schedules, trustee appointment and sale history, court application and approval, equipment and vehicle identities, titles and registrations, purchase contracts and guarantees, values and debt balances, payments, lender documents, abandonment and transfer instruments, new-corporation formation and shares, tax calculations and filings, DMV registrations, agency follow-up, audit, assessment, appeal, and outcome. It does not show which structure was chosen or whether any transfer occurred.

The live annotation preserves the bankrupt corporation, trustee transfer, third-party debt assumption, occasional-sale condition, twelve-month estate-specific count, DMV-registered vehicle exception, and purchaser use tax. It says only “three or more sales,” omitting the supporting letter's “for substantial amounts.” It also omits the parties, ownership changes, two proposed methods, IRC section 351, Chapter 7 and court approval, personal debt payments, equipment values, nonvehicle distinction, statutes, regulations, two cases and citation conflicts, permit consequence, trustee-sale-versus-estate-transfer distinction, missing enclosures and records, and outcome gap.

What this means for you

Bankruptcy trustees and asset purchasers

Count the trustee's separate estate sales before relying on occasional-sale treatment, and isolate registered vehicles from other equipment.

Accountants and tax professionals

Debt assumption can establish consideration even when debt exceeds value. Under this letter, the relevant potentially taxable transaction was the trustee's disposition, not the earlier movement into the bankruptcy estate.

Common questions

Q: Did the transferee's assumption of debt make this a sale?
A: Yes. The letter treated assumed indebtedness as consideration.

Q: When was nonvehicle equipment exempt?
A: When the trustee had not made three or more substantial sales from the estate within 12 months.

Q: Were vehicles covered by that exemption?
A: No. DMV-registered vehicles remained subject to purchaser use tax through registration.

Q: What if the trustee had made at least three substantial sales?
A: The trustee would need a seller's permit and would report sales tax on the nonvehicle equipment sales.

Q: What were the two proposed transfer methods?

A: Transfer title to the guarantor and then contribute the equipment to the new corporation for shares under IRC section 351, or transfer title directly to the new corporation.

Q: Was the trustee's sale history established?

A: No. The lawyer believed there were no other sales, but the source supplies no trustee ledger, court record, or independent confirmation.

Q: Did the live annotation preserve the substantial-amount condition?

A: No. The supporting letter says three or more sales “for substantial amounts”; the live page says three or more sales.

Q: Does the source show which transaction occurred?

A: No. It supplies no court order, transfer document, DMV registration, tax filing, or later outcome.

Citations and references

• California Revenue and Taxation Code §§ 6005, 6006, 6006.5(a), 6006.5(b), 6007, 6051, and 6367
• California Revenue and Taxation Code § 6606.5(a) — printed in the nonvehicle conclusion; unexplained
• California Sales and Use Tax Regulations 1595(a), 1595(c), and 1610(c)
• Internal Revenue Code § 351
• Cal-Metal Corp. v. State Board of Equalization (1984) 161 Cal.App.3d 759
• California State Board of Equalization v. Sierra Summit, Inc., 109 S.Ct. 2228, 104 L.Ed.2d 910 — source prints 1985; resolved case was filed June 12, 1989
• February 20, 1990 request, Exhibit A, May 3 call, and enclosed Regulations 1595 and 1610 — identified or quoted but not included
• Bankruptcy, equipment, debt, ownership, court, transfer, vehicle, tax, and outcome records — described or implicated but not included

Verbatim support

From the official May 30, 1990 John Abbott letter:

An assumption of indebtedness constitutes consideration for a sale, and is included in the measure of the tax.

With respect to the equipment listed in your letter other than vehicles, if the trustee has not made three or more sales for substantial amounts from this bankruptcy estate in a 12-month period, the trustee in this bankruptcy proceeding is not a retailer within the meaning of Section 6007.

The transaction to which the tax applies is the sale by the trustee in bankruptcy, rather than the transfer of the bankrupt corporation’s assets into the bankruptcy estate.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.0980
• Original supporting opinion: 395.0980 PDF

Original ruling text

395.0980

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6493

May 30, 1990

Mr. J--- L. W--Law Office of W--- H. P--XXX --- Place, Suite XXX
---, CA XXXXX

V--- C---, Inc. – FR --- XX XXXXXX
Transfer of equipment from trustee in bankruptcy
Dear Mr. W---:
In your February 20, 1990 letter to the Board’s legal staff, you write: “V--- C---, Inc., was purchasing numerous items of equipment, including vehicles. Mr. P--- V---, majority shareholder and corporation president, was the guarantor on the purchase contracts. V--- C---, Inc., has filed for relief under Chapter 7 of the Bankruptcy Code. The Bankruptcy Trustee is obtaining approval of the court to abandon the equipment. When the trustee releases the interest of the bankruptcy estate, the equipment is to be transferred to a new corporation. “A list of the affected equipment is attached hereto as Exhibit A and fully incorporated herein. Please note that the amount of the debt against each equipment item exceeds its value in most cases. “This office represents P--- V---. Mr. V--- proposes to effect the above transfer by one of two methods, depending upon the tax consequences: 1) the trustee abandons the equipment to Mr. V--- who then contributes it to the new corporation for shares under Internal Revenue Code §351; or 2) the trustee abandons the equipment directly to the new corporation. The ultimate ownership of the equipment will be slightly different I the new corporation from the old. The shareholders of V--- C---, Inc., are P--- V--- (80%), R--- M--- (10%), and F--I--- (10%). The shareholders of the new entity will be P--- V--- (50%) and R--V--- (50%).

Mr. J--- L. W---

-2-

May 30, 1990
395.0980

“Please advise me as to the sales and/or use tax consequences of transferring the equipment to the new corporation by both of the above proposed conveyances. If you need any further information to make your evaluation, please do not hesitate to call.” In our telephone conversation on May 3, 1990, you related that Mr. V--- has been personally making the payments due on the indebtedness on this equipment. The trustee in bankruptcy will transfer title to the equipment either to Mr. V--- individually or to the new corporation. The indebtedness on the equipment will be assumed either by Mr. V--- or by the new corporation. You believe the trustee has not made any other sales in the bankruptcy proceeding. Opinion Under the Sales and Use Tax Law, sales at retail of tangible personal property for a consideration are subject to the sales tax, unless a specific exemption or exclusion applies. (Rev. & Tax. Code §§ 6006, 6051). An assumption of indebtedness constitutes consideration for a sale, and is included in the measure of the tax. (Cal-Metal Corp. v. State Board of Equalization (1984) 161 Cal.App.3d 759). The sales tax is imposed on retailers. A retailer is a person who is engaged in the business of making sales of tangible personal property at retail. (Rev. & Tax. Code §§ 6051, 6007). In order to interpret and apply the provisions of Section 6007 regarding the definition of a retailer, the Board has adopted Sales and Use Tax Regulation 1595. In part, subdivision (a) of that regulation requires a person who makes three or more sales for substantial amounts in a 12-month period to hold a seller’s permit. Under Revenue and Taxation Code Section 6005, a trustee in bankruptcy is specifically included in the definition of a “person” for sales and use tax purposes. In California State Board of Equalization v. Sierra Summit, Inc. (1985) 109 S.Ct. 2228, 104 L.Ed. 2d 910, the U. S. Supreme Court held that the state could constitutionally impose its sales tax on liquidation sales by a trustee in bankruptcy. An exemption from sales and use tax is provided for occasional sales. (Rev. & Tax. Code § 6367). A person may make an occasional sale exempt from sales tax if he is not engaged in activities requiring a seller’s permit, or if he does not make a series of sales sufficient in number, scope, and character to require the holding of a seller’s permit. (Reg. 1595(a)(1) and (a)(4)). In addition, certain types of transactions involving business reorganizations described in subdivision (b) of Regulation 1595 are also exempt occasional sales. With respect to the equipment listed in your letter other than vehicles, if the trustee has not made three or more sales for substantial amounts from this bankruptcy estate in a 12-month period, the trustee in this bankruptcy proceeding is not a retailer within the meaning of Section 6007. No sales or use tax will apply to the trustee’s sale of the equipment either to Mr. V--- or the new corporation, since the transaction would qualify as an occasional sale exempt from tax under Sections 6606.5(a) and 6367.

Mr. J--- L. W---

-3-

May 30, 1990
395.0980

However, the occasional sale exemption does not apply to sales of vehicles required to be registered with the Department of Motor Vehicles. (Reg. 1595(c)). Instead, if a vehicle is purchased from a non-dealer, the applicable tax is the use tax imposed on the purchaser and is payable to the Department of Motor Vehicles (DMV) when the purchaser registers the vehicle with that department. (Reg. 1610(c)). Please note that if your belief is not correct that the trustee has not made three or more sales for substantial amounts form this bankruptcy estate in a 12-month period, then the trustee is required to hold a seller’s permit, and report and pay sales tax on the sales of the equipment other than vehicles required to be registered with DMV. If this is the case, then the occasional sale exemption provided by subdivision (b) of Section 6006.5 (business reorganizations) would not apply to exempt this transaction from tax. The transaction to which the tax applies is the sale by the trustee in bankruptcy, rather than the transfer of the bankrupt corporation’s assets into the bankruptcy estate. I enclose Regulations 1595 and 1610 for your information. Please feel free to contact me if you have any further questions or comments about this letter. Sincerely,

John Abbott
Senior Tax Counsel

JA:jb
Enclosures