Did a post-closing contract amendment shifting value from tangible assets to goodwill reduce the sales-tax measure established when title passed?

Plain-English summary

A buyer and seller allocated a business purchase price among specific assets, and title passed on or about June 30, 1965. More than three months later, they amended the agreement without changing the total price, increasing goodwill and reducing “other assets,” including tangible personal property. The buyer had agreed to pay the sales tax, which the agency had determined and billed before the amendment.

Tax Counsel said the audit should not change. The original agreement showed what the willing buyer and seller valued when title passed and the retailer's tax liability arose. The later amendment provided no evidence that goodwill's true value had changed or that its allocation was more accurate.

The memorandum said the Board, as a third party, was not bound by the parties' amendment. The only apparent consideration was the buyer's promise to collect accounts receivable and handle uncollectible accounts as paragraph 2(b) already required. No more reasonable alternative valuation was offered, so counsel recommended leaving the billing unchanged.

The source twice dates the amendment October 15, 1965, but its final line calls it the Octobe 10, 1965 amendment. This page follows the repeated October 15 date and preserves the conflicting original line below.

Audit posture, valuation reasoning, authorities, and source limits

Tax Counsel identified only by the initials LWR wrote to Marysville–Auditing (CB) on December 23, 1965. The response addresses a November 15 audit memo and a September 29 letter from seller A's attorney, neither of which is included. Buyer P, seller A, the business, and every asset are otherwise unidentified. The source gives no total price, original allocation, amended allocation, goodwill amount, tangible-property amount, or tax amount.

The contract was executed and title passed on or about June 30. The October 15 amendment increased goodwill without changing the business's total selling price, reducing the allocation to other assets and the sales-tax measure. Between closing and amendment, the tax liability was determined and billed. P had contractually agreed to pay it and sought a reduced bill.

Calling the issue novel in Board records, counsel relied on Sales and Use Tax Ruling 81 for tax on the gross receipts representing the fair retail value of tangible personal property held or used in an activity requiring the seller to hold a permit. The memorandum says A's sale to P “seems to fit” the ruling, but CDTFA's PDF does not reproduce Ruling 81, the permit record, the business activity, or the asset schedule.

The memorandum treated fair market value and fair retail value as synonymous for this purpose. It cited Montrose Cemetery for the willing-buyer, willing-seller definition; the PDF spells the name Cemetary. It then used Hawley v. Johnson, where the parties' $500 automobile trade-in allowance controlled even though book value was $400 and the seller recorded the $100 difference as an overallowance, as support for fixing the sales price when the transaction occurred.

Counsel said retailer sales-tax liability arose when title to the tangible property passed. Citing Santa Clara Sand & Gravel, the memorandum reasoned that the Board could use the contract as evidence of the parties' asset values without becoming contractually bound by their later amendment.

The memorandum separately questioned whether the amendment was enforceable. It cited Maryland Casualty, In re Riff, Peachy, and George for the need for fresh consideration to change an existing contract. It cited Moore, Tipton, Avery, and former Civil Code section 1605 for the rule that promising to perform an existing obligation is not new consideration. Paragraph 2(b) already required P to collect A's accounts receivable for 90 days and deliver the uncollectible accounts that P did not purchase. The September 29 letter apparently identified that same duty as the amendment's only consideration.

The source prints In re Riff at 205 F. 409, a pinpoint in an opinion beginning at 205 F. 406; George at 33 Cal. 2d at 855, a pinpoint in an opinion beginning at 33 Cal.2d 834; and Avery at 159 F. Supp. 907, a pinpoint in an opinion beginning at 159 F.Supp. 906. Separate citation verification resolved all ten named cases to the intended case names. This page preserves the PDF's printed citations.

Counsel left room to consider an alternative standard more reasonable than the closing agreement but found none in the supplied record. The memorandum is an internal opinion that the audit should remain unchanged; it supplies no signed contract, amendment, attorney letter, audit memo, invoices, asset schedule, appraisal, goodwill analysis, accounts-receivable schedule, permit, title records, billing, payment, taxpayer response, administrative review, Board order, appeal, refund, collection, or later outcome. It does not establish whether the recommendation became final.

The live annotation preserves the business-sale allocation, post-title goodwill increase, reduced tangible-property value, missing valuation evidence and consideration, and conclusion that tax applied under the original contract allocation. It omits the parties, audit posture, June 30 and October 15 dates, buyer's tax-payment obligation, intervening billing, Ruling 81, fair-value discussion, all ten cases, former section 1605, paragraph 2(b), September 29 letter, 90-day accounts-receivable duty, novel-case statement, alternative-standard invitation, conflicting October 10 final line, missing records, and absent final Board action.

What this means for you

Buyers and sellers of businesses

Asset and goodwill allocations should be supportable when the deal closes. This memorandum did not accept a later reallocation without evidence of a more accurate value and new consideration.

Accountants and tax professionals

Keep the signed agreement, asset schedule, contemporaneous appraisal and negotiation evidence, title-passage record, tax computation, and distinct new consideration for any amendment.

Common questions

Q: When was taxable value established?
A: When title passed under the original negotiated agreement.

Q: Did keeping the total business price unchanged validate the reallocation?
A: No. The amendment still lacked evidence supporting the higher goodwill value.

Q: Was the Board bound by the buyer and seller's amended contract?
A: No. It used the contract as evidence of fair retail value but was not contractually bound by it.

Q: Was there new consideration for the amendment?
A: Apparently not; the buyer merely promised performance already owed under the original contract.

Q: What existing duty did the buyer promise again?

A: Paragraph 2(b) already required 90 days of accounts-receivable collection and delivery to the seller of uncollectible accounts the buyer did not purchase.

Q: Did counsel rule out every later valuation?

A: No. The memorandum invited consideration of a more reasonable alternative standard but said none had been offered.

Q: Was leaving the audit unchanged a final Board decision?

A: The PDF shows only Tax Counsel's internal opinion. It includes no Board order, taxpayer response, appeal, or later outcome.

Q: Which amendment date does the source support?

A: October 15 appears twice in the body. The final line prints Octobe 10; no amendment is included to resolve the conflict.

Citations and references

• California Sales and Use Tax Ruling 81 — cited but not reproduced
• Former California Civil Code § 1605
• Montrose Cemetery Co. v. Commissioner of Internal Revenue, 105 F.2d 238, 242 (7th Cir. 1939) — PDF prints Cemetary
• Hawley v. Johnson, 58 Cal.App.2d 232 (1943)
• Santa Clara Sand & Gravel Co. v. State Board of Equalization, 225 Cal.App.2d 676 (1964)
• Maryland Casualty Co. v. First National Bank, 82 F.2d 465, 467 (5th Cir. 1936)
• In re Riff, 205 F. 409 as printed — pinpoint in an opinion beginning at 205 F. 406
• Peachy v. Witter, 131 Cal. 316 (1901)
• George v. Bekins Van & Storage Co., 33 Cal.2d at 855 as printed — pinpoint in an opinion beginning at 33 Cal.2d 834
• Moore v. Bartholomae Corp., 69 Cal.App.2d 474 (1945)
• Tipton v. Tipton, 133 Cal.App. 500 (1933)
• Avery v. Schuman Co., 159 F.Supp. 907 as printed — pinpoint in an opinion beginning at 159 F.Supp. 906
• November 15 audit memo; sale contract and paragraph 2(b); September 29 attorney letter; October amendment; valuation, asset, tax, administrative, and outcome records — identified, described, or implicated but not included

Verbatim support

From the official December 23, 1965 Tax Counsel memorandum:

It is our opinion that the audit should not be changed because of the subsequent amendment.

The sales price was established at the time of sale when title passed on June 30, 1965, which was over three months before the amendment on October 15, 1965.

The Board, in using the terms of the contract to establish the “fair retail value” is not binding itself to the contract but simply recognizing its provisions to determine at what price the sale occurred, and what value the parties placed on the various assets at the time they were bargaining for the sale.

If an alternative standard is offered that is more reasonable than the terms of the agreement between the buyer and seller at the time of sale, it should be given consideration, but under the circumstances of this case, no such alternative standard has been offered and the audit should remain unchanged by the Octobe 10, 1965 amendment.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1000
• Original supporting opinion: 395.1000 PDF

Original ruling text

State of California

Memorandum

To:

Marysville – Auditing (CB)

From:

Tax Counsel (LWR)

Board of Equalization

395.1000

December 23, 1965

Your memo dated November 15 asked our opinion on circumstances under which “P” entered into a contract with “A” to purchase “A”’s business. The contract provided for a valuation of the various assets of the business. The sales contract was executed and title passed on or about June 30, 1965. On October 15, 1965, an amendment to the contract was exectued increasing the value of “good will” without changing the amount for the sale of the entire business. This had the effect of reducing the valuation of “other assets”, including tangible personal property, thereby reducing the measure of sales tax. Between the execution of the contract and the amendment, the sales tax liability on the sale was determined and billed. Now “P”, who agreed to pay the sales tax under the terms of the contract, is asking for a reduction in the tax billing. It is our opinion that the audit should not be changed because of the subsequent amendment. Our records indicate that this is a novel case and we have not had a prior opportunity to review an identical set of circumstances. As you know, Ruling 81 provides that in the sale of a business, the tax applies to the gross receipts that represent the fair retail value of tangible personal property held or used in the course of an activity for which the seller is required to hold a seller’s permit. The sale by “A” to “P” seems to fit within Ruling 81. The terms “fair market value” and “fair retail value” seem to by synonymous with their application under the Sales and Use Tax Law. Fair market value is generally defined as the price at which a willing seller and a willing buyer will trade. (Montrose Cemetary Co. v. Commissioner of Internal Revenue, 105 F.2d 238, 242.) In Hawley v. Johnson, 58 Cal. App. 2d 232, the plainiff complained that the book value, rather than the stated trade-in value of a traded in automobile should be used as the measure of sales tax in an automobile sales transaction. The agreement provided for a trade-in allowance of $500 while the book value of the traded in car was only $400. The $100 difference was carried as an overallowance on the seller’s books. The seller’s contention would have had the effect of

Marysville – Auditing (CB)

-2-

December 23, 1965
395.1000

reducing the total amount of the sale resulting in a reduced sales tax. The court pointed out that although the traded in car might be worth only $400 on the open market, the parties to the transaction agreed on an allowance in the amount of $500, and the amount of $500 should be used in determining the measure of tax even though $100 of that amount was listed as an overallowance on the books of the seller. Although Hawley v. Johnson does not consider the later amendment of a sales agreement, it does imply that the sales price is established at the time the transaction occurs, and the sales agreement may be used to determine the value of the tangible personal property involved. In the present case, it seems that the fair retail value should be the price at which the willing buyer, “P”, was willing to buy and the willing seller, “A”, was willing to sell, as established by their actions and agreement at the time the sale occurred. Obviously, they were both agreed on the value of the property at the time of sale. On the other hand, there is no indication or evidence that the revaluation of “good will”, reducing the value of the assets, had any relation to a change in true value or fair market value of the “good will” or that the later valuation was any more precise than the original valuation. Also, there are other factors to consider. The sales tax liability is an obligation of the “retailer” and arises upon passage of title to the tangible personal property. The sales price was established at the time of sale when title passed on June 30, 1965, which was over three months before the amendment on October 15, 1965. Since the Board, as a third party, is not bound by the contract of the buyer and seller (Santa Clara Sand and Gravel Co. v. State Board of Equalization, 225 Cal. App. 2d 676), the amendment to the contract is not binding upon the Board’s determination. The Board, in using the terms of the contract to establish the “fair retail value” is not binding itself to the contract but simply recognizing its provisions to determine at what price the sale occurred, and what value the parties placed on the various assets at the time they were bargaining for the sale. Another factor, indecisive by itself but one which militates agains the taxpayer’s position, is that there is no apparent consideration for the reallocation of value from “other assets” to “good will”. It is a concept old in the law that an agreement to change the terms of an existing contract is a separate contract within itself and must be supported with adequate consideration other than the consideration on which the original contract was based. (Maryland Casualty Co. v. First National Bank of Atlanta, Tex., 82 F.2d. 465, 467; In re Riff, 205 F. 409; Peachy v. Witter, 131 Cal. 316; George v. Bekins Van & Storage Co., 33 Cal. 2d at 855.) At the same time, the promise to perform an obligatory act or an existing duty is not consideration. The party promising such performance is not giving anything new to the person getting the promise. This concept is equally old in the law. (Moore v. Bartholomae Corp., 69 Cal. App. 2d 474; Tipton v. Tipton, 133 Cal. App. 500; Avery v. Schuman Co., 159 F. Supp. 907; and Section 1605 California Civil Code.)

Marysville – Auditing (CB)

-3-

December 23, 1965
395.1000

In the contract before us, under paragraph 2(b) the buyer agrees to collect the seller’s accounts receivable for a 90-day period and deliver to the seller all uncollectible accounts that the buyer does not purchase. In the letter of September 29, 1965, from “A”’s attorney, it appears that the only consideration for the reallocation is the promise of the buyer to do what he was obligated to do under the original contract. Therefore, it appears that the only consideration for the amount is the promise to perform an existing obligatory act or duty. There is no reason for the Board to agree that the amendment represents the fair retail value of the “good will” or “other assets” when the amendment does not represent the value at which title to the property was passed, nor the value which was bargained for by the parties. This is particularly true when the amendment does not have the apparent dignity of an enforceable contract between the parties. If an alternative standard is offered that is more reasonable than the terms of the agreement between the buyer and seller at the time of sale, it should be given consideration, but under the circumstances of this case, no such alternative standard has been offered and the audit should remain unchanged by the Octobe 10, 1965 amendment.

WLR:em

[1b]