Did buyers' temporary possession become a sale when escrow failed but a separate oral rental agreement paid the seller for immediate possession?

Plain-English summary

A seller agreed to transfer real and tangible personal property through escrow. Title would not pass until the purchasers made an $8,500 payment into escrow. At the agreement, they paid $500 toward the purchase price and separately paid $100 under an oral rental agreement for immediate possession.

The purchasers did not complete escrow. They returned the business, and the seller retained the $500 deposit as damages.

Counsel concluded that temporary possession was a rental apart from the sale contract, not possession transferred in lieu of title. The letter therefore recommended granting the seller's $164 refund claim, but it gives no Board action or payment outcome.

Escrow terms, separate rental, and source limits

Associate Tax Counsel Warren W. Mangels wrote to O--- M. T--- on April 14, 1958 about a redacted account. The letter copies Mr. J--- F--- and a Pasadena recipient identified only as Mr. A--- B---. It provides no incoming request, claim, audit, or prior correspondence.

The transaction covered both real and tangible personal property. Under the escrow agreement, title would not pass until the purchasers paid $8,500 into escrow. At the time of the agreement, they paid the seller $500 as a purchase-price down payment and made a separate oral rental agreement: for $100 apart from the purchase price, the seller transferred immediate possession.

The purchasers failed to complete escrow, returned possession of the business, and lost the $500 deposit, which the seller retained as damages. The source does not identify the purchasers, business, real property, tangible property, total purchase price, transaction date, possession period, unpaid amount, default reason, or business-return terms.

Counsel described two possible sales without title transfer: possession found by the Board to be in lieu of title, or possession with the seller retaining title only to secure the purchase price. The letter cites no section number. It treated this possession as a separate rental supported by separate consideration, not a possession transfer replacing title. It does not separately analyze the tax treatment of the rental payment.

Staff recommended that the Board grant a $164 refund. The PDF does not include the sale contract, escrow agreement or ledger, $8,500 term details, $500 payment record, oral rental terms, $100 payment record, possession or operating records, default notice, business-return instrument, damages calculation, asset schedule, title record, tax return, audit, assessment, tax payment, refund claim or calculation, recommendation record, Board calendar, order, payment, appeal, or later outcome. It does not establish that the Board granted the refund.

The live annotation preserves the title condition, down payment, separate paid oral rental, failed escrow, returned possession, retained damages, and no-sale conclusion. It replaces the source's $8,500, $500, and $100 with “specified,” “nominal,” and “additional” consideration; shifts between singular and plural purchasers; and omits the seller, redacted account, real and tangible property, immediate-possession term, unnumbered retained-title-as-security test, $164 refund recommendation, copied recipients, missing records, and absent Board action or outcome.

What this means for you

Sellers allowing occupancy before closing

Under this letter, a separately paid rental agreement mattered when the purchase failed because possession had its own consideration apart from the sale price.

Attorneys and tax professionals

Document whether pre-closing possession is rent, part performance of the sale, security for payment, or a substitute for title. Preserve the separate payment, occupancy term, default, return, and damages records.

Common questions

Q: How much had to be deposited before title would pass?

A: $8,500.

Q: What amounts did the buyers initially pay?

A: A $500 purchase deposit and a separate $100 rental payment.

Q: Why was possession not a sale?

A: It arose from the separate rental agreement rather than from a possession transfer replacing or securing title.

Q: What refund was recommended?

A: $164, but the source supplies no Board order or payment result.

Q: What happened to the $500 down payment?

A: The seller retained it as damages after the purchasers failed to complete escrow and returned the business.

Q: Does the letter decide tax on the $100 rental?

A: No. It uses the rental to classify possession but does not separately state the rental payment's tax treatment.

Q: Did the Board grant the refund?

A: The letter contains only staff's recommendation. No final action or later outcome is included.

Citations and references

• California Sales and Use Tax Law possession-in-lieu-of-title and retained-title-as-security sale tests — described without section numbers
• Escrow agreement requiring an $8,500 payment before title passage — described but not included
• Oral $100 immediate-possession rental agreement — described but not included
• $164 refund claim — amount identified; claim, Board action, and payment are not included
• Sale, property, escrow, payment, rental, possession, default, return, damages, tax, refund, administrative, and outcome records — described or implicated but not included

Verbatim support

From the official April 14, 1958 Warren W. Mangels letter:

At the time of the agreement, the purchasers paid you the sum of $500 as a down-payment toward the purchase price and at the same time you and the purchasers entered into an oral rental agreement whereunder, in consideration of the sum of $100.00 (apart from the agreed purchase price), you would transfer possession to the intended purchasers immediately.

As a result, the possession of the business was returned to you and you retained the $500.00 deposit as damages.

However, in your case we feel that the transfer of possession to the intended purchasers should be regarded as a rental apart from the contract of sale and not a transfer of possession in lieu of a transfer of title.

Therefore, we shall recommend that your claim for refund in the amount of $164.00 be granted.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1160
• Original supporting opinion: 395.1160 PDF

Original ruling text

395.1160

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

April 14, 1958

Mrs. O--- M. T--XXXX South --- Avenue
---, California

-- - XXXXX

Dear Mrs. T---:
Your case involves a sale of both real and tangible personal property under an escrow agreement wherein title to the purchasers was not to pass until said purchasers made a payment of $8,500 to be deposited into escrow. At the time of the agreement, the purchasers paid you the sum of $500 as a down-payment toward the purchase price and at the same time you and the purchasers entered into an oral rental agreement whereunder, in consideration of the sum of $100.00 (apart from the agreed purchase price), you would transfer possession to the intended purchasers immediately. However, the intended purchasers failed to complete the escrow agreement. As a result, the possession of the business was returned to you and you retained the $500.00 deposit as damages. The question is whether or not there was a sale by you of tangible personal property. Where there is no transfer of title, a transfer of possession may, nevertheless, be a sale if it is of the type found by the Board to be in lieu of a transfer of title or if there is a transfer of possession with the seller retaining title only to secure payment of the purchase price. However, in your case we feel that the transfer of possession to the intended purchasers should be regarded as a rental apart from the contract of sale and not a transfer of possession in lieu of a transfer of title.

Mrs. O--- M. T--Account -- - XXXXX

-2-

April 14, 1958
395.1160

Therefore, we shall recommend that your claim for refund in the amount of $164.00 be granted. Very truly yours,

Warren W. Mangels
Associate Tax Counsel

WWM:rc

cc:

Mr. J--- F--XXX South --- Avenue
---, California

cc:

Pasadena – Mr. A--- B---