Could a restaurant buyer reduce the sales-tax measure by suing to reform or rescind the contract after paying the price into escrow and taking possession?

Plain-English summary

A restaurant buyer and seller signed a memorandum of sale and purchase on February 13, 1992. A redacted $XX,000.00 purchase price was paid to the escrow officer that day. The buyer took possession in March, although the funds remained in escrow when staff wrote in April 1993.

The buyer later sued for contract reformation and rescission, alleging that the restaurant equipment was unsuitable and asking the court to reduce the purchase price to the business's true value.

The Legal Division concluded that the executory contract, escrowed price, and possession completed the sale. Under the cited California Supreme Court decision, a later litigation-settlement adjustment did not entitle a taxpayer to a refund of tax initially computed from the agreed price. Staff therefore used the restaurant's original price, but the source does not show the lawsuit or tax outcome.

Transaction timeline, payer wording conflict, case authority, and limits

Tax Counsel Thomas Cooke wrote to Ventura Compliance Supervisor Doug Carroll on April 22, 1993 about redacted taxpayer C--- K--- Y---, others, and account SR--XX-XXXXXX. The Legal Division had received unspecified materials about a redacted fast-food restaurant sale. The source does not identify the sender, contents, or date of those materials.

Buyer and seller signed a February 13, 1992 memorandum of sale and purchase. The first paragraph says the $XX,000.00 price “was paid to the escrow officer” that day. It says the buyer took possession in March 1992 and the price remained in escrow. The next paragraph says “the seller tendered the agreed purchase price into escrow.” The PDF supplies no payment record or escrow ledger to resolve whether seller is a source error, so this page does not silently substitute a party.

The buyer filed a superior-court complaint seeking both contract reformation and rescission. It alleged that furnished equipment was unsuitable for restaurant use and requested a price reduction to reflect the business's true value. The source identifies no court, case number, complaint date, equipment, defect, evidence, requested amount, answer, motion, ruling, settlement, rescission, reformed price, or disposition.

Cooke said the signed executory contract, tender of the price into escrow, and possession meant the business sale had occurred. The memorandum cites Southern California Edison Co. v. State Board of Equalization, 7 Cal.3d 652, 102 Cal.Rptr. 766 (1972), for computing tax on the agreed tangible-property price and denying a tax refund after a later litigation-settlement price adjustment.

The restaurant complaint was still described as filed and seeking relief; the source does not say a settlement or price adjustment had occurred. Legal Division nevertheless concluded that sales tax was properly assessed on the original redacted price. The PDF does not include the received materials, sale memorandum, equipment schedule, valuation or suitability evidence, escrow instructions or ledger, payment source, possession record, complaint or docket, settlement, court judgment, purchase-price allocation, tax return, audit, assessment, payment, refund claim, Board action, appeal, collection, or later outcome.

The live annotation preserves the executory contract, escrowed agreed price, possession, completed-sale view, pending reformation and rescission complaint, unsuitable-equipment allegation, requested true-value reduction, Southern California Edison principle without naming the case, and original-price result. It omits every party and date, the redacted restaurant and account, unidentified materials, $XX,000.00 price, year-long escrow posture, source's buyer/seller tender wording conflict, court-record and transaction gaps, named authority and citation, staff-opinion posture, and absent court or tax outcome.

What this means for you

Buyers disputing acquired equipment

Under this memorandum, taking possession under a signed contract completed the sale for tax purposes even while the purchase funds remained in escrow.

Accountants and tax professionals

Do not assume that filing for rescission or reformation retroactively changes the taxable price. Separate a pending complaint from an actual judgment, settlement, returned consideration, or tax adjustment.

Common questions

Q: Why was the sale considered complete?
A: The parties signed the agreement, the price was tendered into escrow, and the buyer took possession.

Q: Who paid the escrow officer?

A: The source first says the price “was paid” to the escrow officer, then says the seller tendered it. No payment record resolves that wording conflict.

Q: Did the buyer's equipment complaint undo the sale?
A: No. The memorandum treated it as a later dispute over an already completed transaction.

Q: Could a later court settlement lower the original tax measure?
A: The cited case said a later litigation-settlement adjustment did not create a refund of initially computed tax. The restaurant source shows no actual settlement.

Q: What price controlled?
A: The original contract price placed into escrow, but its amount is redacted as $XX,000.00.

Q: Did the restaurant buyer win reformation or rescission?

A: The PDF says only that the complaint had been filed. It supplies no docket, order, settlement, or disposition.

Q: Is there a final tax outcome?

A: No. The memorandum states Legal Division's assessment view but gives no audit, refund proceeding, Board action, appeal, or later result.

Citations and references

• Southern California Edison Co. v. State Board of Equalization, 7 Cal.3d 652, 102 Cal.Rptr. 766 (1972)
• Unspecified materials received by Legal Division — contents, sender, date, and copies not identified
• February 13, 1992 memorandum of sale and purchase — quoted and summarized but not included
• Superior-court reformation and rescission complaint — described but court, case number, filing, pleadings, and outcome not included
• Agreement, payment, escrow, possession, equipment, valuation, lawsuit, settlement, allocation, tax, administrative, and outcome records — described or implicated but not included

Verbatim support

From the official April 22, 1993 Thomas Cooke memorandum:

The purchase price of $XX,000.00 was paid to the escrow officer on February 13, 1992. The buyer took possession of the business in March of 1992. The purchase price remains in escrow.

The seller tendered the agreed purchase price into escrow. The buyer took possession of the business. It is our opinion that the sale of the business has occurred.

In Southern California Edison Co. v. State Board of Equalization (1972) 7 Cal.3d 652, 102 Cal.Rptr. 766, the court held that sales and use taxes are properly computed on the agreed-upon selling price of tangible personal property and a subsequent “adjustment” of the sales price as part of a settlement of litigation does not entitle a taxpayer to a refund of any portion of the initially-computed sales or use tax.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1252
• Original supporting opinion: 395.1252 PDF

Original ruling text

State of California

Board of Equalization
Legal Division

395.1252

Memorandum

To

:

Mr. Doug Carroll
Ventura Compliance Supervisor - AR

From :

Thomas Cooke
Tax Counsel

Subject:

C--- K--- Y---, et al.
SR -- XX-XXXXXX

Date:

April 22, 1993

This office has received some materials concerning a sale of a restaurant known as ----- --- Fast Food Restaurant. Buyer and seller signed a “memorandum of sale and purchase” for the restaurant on February 13, 1992. The purchase price of $XX,000.00 was paid to the escrow officer on February 13, 1992. The buyer took possession of the business in March of 1992. The purchase price remains in escrow. The buyer has filed a complaint in superior court seeking reformation of the contract and rescission alleging that the equipment furnished was not suitable for use in the restaurant and requesting that the court reduce the purchase price to reflect the true valuation of the business. The buyer and seller signed an executory contract for the sale of the business. The seller tendered the agreed purchase price into escrow. The buyer took possession of the business. It is our opinion that the sale of the business has occurred. The buyer of the restaurant is unhappy with the equipment sold with the business. The buyer has filed suit to obtain relief. In Southern California Edison Co. v. State Board of Equalization (1972) 7 Cal.3d 652, 102 Cal.Rptr. 766, the court held that sales and use taxes are properly computed on the agreed-upon selling price of tangible personal property and a subsequent “adjustment” of the sales price as part of a settlement of litigation does not entitle a taxpayer to a refund of any portion of the initially-computed sales or use tax. It is the opinion of the Legal Division that the sale of the business has occurred and sales tax is properly assessed calculated on the original sales price of $XX,000.00. TC:wk cc:

Mr. R. A. Slater
Collections Section (MIC:55)
Mr. Gordon P. Adelman