Did incorporating only a manufacturer's sales and distribution segment qualify as an exempt occasional sale?

Plain-English summary

An unidentified manufacturer proposed incorporating its sales and distribution activities while retaining manufacturing. The broader manufacturing, sales, and distribution business reportedly held approximately $10,000 of assets, including certain tangible personal property. The source does not value the proposed segment separately.

The owner would transfer certain assets for stock, described as all assets reasonably attributable to sales and distribution. Afterward the client would be a majority shareholder and own substantially all outstanding stock in the new corporation, but the request gave no percentage.

Board counsel said the transfer did not meet section 6006.5(b) or Ruling 81 because only part of the property or one segment of the overall business was moving. The letter also said substantially similar ownership required at least 80% continuity, but the request did not provide enough detail for counsel to decide that separate requirement.

Counsel identified a different possible route. If the assets went to a commencing corporation solely for stock, the corporation assumed no debt or other liabilities, and that stock had no value apart from the transferred property, staff would not regard the transaction as a taxable sale. The letter does not show whether those conditions held or whether the proposal occurred.

The source has an internal date conflict: page 1 says June 23, 1953, while page 2 says July 23, 1953. The live annotation also uses July 23, so that published date controls this page, but nothing resolves the conflicting first page.

Proposed segment, two legal theories, date conflict, and source limits

Associate Tax Counsel John H. Murray addressed F---, V--- & R---, attention S--- R. R---. Page 1 identifies an April 20 incoming letter but omits the year. A redacted Auditing recipient was copied. The client and business are not identified.

The request described a current manufacturing business that sold and distributed its products. Its manufacturing, sales, and distribution assets were worth approximately $10,000 and included unspecified tangible personal property. The owner proposed transferring all assets reasonably attributable to sales and distribution to a new corporation for stock.

The source gives no asset list, accounting allocation, appraisal, tangible-property amount, retained manufacturing property, location, permit, product, customer, stock amount, corporation records, consideration beyond stock, debt, liability, agreement, or planned transfer date.

The first theory invoked Board Ruling 81 and section 6006.5(b). Murray said they required all or substantially all property held or used in a seller-permit activity to transfer and real or ultimate ownership to remain substantially unchanged. Moving only part of the property or one business segment failed the property-scope requirement, even if every asset attributed to that segment moved.

Counsel said staff consistently interpreted substantially similar ownership as at least 80 percent. The request said only majority and substantially all, so Murray could not determine whether the proposal met the ownership requirement. The source supplies no pre-transfer ownership interest, proposed shares, stock percentage, stock class, capitalization, outside shareholders, attribution analysis, or calculation.

The second theory did not label the transfer occasional. Murray said a transfer to a commencing corporation solely for stock would not be a taxable sale if the corporation assumed no indebtedness or other transferor liabilities, because its stock had no value except what the transferred property gave it. The letter does not decide whether the corporation was commencing, the stock was first issued or initially valueless, liabilities existed, or any were assumed.

The PDF supplies no incoming request beyond its summary; client, entity, asset, valuation, allocation, permit, manufacturing-retention, ownership, stock, capitalization, agreement, debt, liability, accounting, closing, return, audit, assessment, payment, refund, administrative action, appeal, or later outcome records. It does not show a completed transfer or tax result.

The live annotation preserves the manufacturing example, sales-and-distribution segment, corporate stock exchange, partial-property rule, and July 23 date. It omits the requester and April 20 letter; unidentified client and proposed posture; approximately $10,000 asset value; tangible personal property; all segment assets and retained manufacturing; majority and substantially-all stock descriptions; Ruling 81 and section 6006.5(b); the unresolved 80-percent ownership issue; the entire commencing-corporation/no-liability alternative; June/July date conflict; missing records; and absent outcome.

What this means for you

Owners incorporating one business division

Under this letter, moving every asset attributed to one segment did not equal moving all or substantially all property of the broader permit-requiring activity.

Accountants and tax professionals

Analyze the theories separately: occasional-sale treatment required broader asset scope and ownership evidence, while the formation theory depended on stock value and the complete absence of assumed debt or liabilities.

Common questions

Q: What part of the business was transferred?
A: The sales and distribution segment, not the retained manufacturing operation.

Q: Did moving all segment assets satisfy the substantially-all test?
A: No. Counsel applied the test to the broader business activity.

Q: What ownership threshold did the letter describe?
A: At least 80-percent similarity, but counsel could not determine whether the proposal met it.

Q: When might the transfer avoid being a sale?
A: If the new corporation issued only its initially valueless stock and assumed no debt or other liabilities.

Q: What did the approximately $10,000 describe?

A: Assets of the manufacturing, sales, and distribution business, including unspecified tangible personal property—not a supported value for the sales-and-distribution segment alone.

Q: Which issue date is correct?

A: The PDF prints June 23 on page 1 and July 23 on page 2. The live annotation uses July 23, but the source does not resolve the conflict.

Q: Did the proposed transfer occur?

A: The source gives no agreements, stock issuance, liability records, closing, return, assessment, or later outcome.

Citations and references

• California Revenue and Taxation Code § 6006.5(b)
• California State Board of Equalization Ruling 81, as applied in the letter
• April 20 request and redacted Auditing copy — identified but not included
• Client, business, asset, value, allocation, permit, corporation, ownership, stock, capitalization, debt, liability, agreement, accounting, return, tax, administrative, and outcome records — described or implicated but not included

Verbatim support

From the official June/July 1953 John H. Murray letter:

Therefore, a transfer of a part of the property or merely one segment of the business does not meet the requirement of the statute nor Ruling 81.

We have consistently interpreted this as requiring at least 80% similarity of ownership. We cannot determine from your letter whether the transfer in question would meet this portion of the requirement for tax exemption under Ruling 81.

If your client transferred the assets in question to a commencing corporation solely in exchange for stock and the corporation did not assume any indebtedness or other liabilities of the transferor, we would not consider the transaction as a taxable sale for the reason that the stock had no value other than that given to it by reason of the transfer of the property involved.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1380
• Original supporting opinion: 395.1380 PDF

Original ruling text

395.1380

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

June 23, 1953

F---, V--- & R--XXXX --- Boulevard
--- --- X, California
Attention:

Your letter of April 20

Mr. S--- R. R---

Gentlemen:
You request our advice as to the application of the California sales tax to the following facts: One of your clients currently operates a manufacturing business and in connection therewith sells and distributes the products of that business. The assets of the manufacturing sales and distribution business have a value of approximately $10,000.00, including certain tangible personal property. The owner proposes to incorporate the sales and distribution activities and to transfer certain of the assets to the corporation in return for stock. These assets transferred will be all of the assets reasonably attributable to the sales and distribution activities of the business. After the transfer, your client will be a majority stockholder and will own substantially all of the outstanding stock of the new corporation. You ask whether this transfer will meet the requirements under Ruling 81 and not be subject to tax. Ruling 81 and section 6006.5(b) upon which the ruling is based, provide that a transfer of all or substantially all of the property held or used in the course of an activity for which a seller’s permit is required is not subject to tax if, after the transfer, the real or ultimate ownership of the property is substantially unchanged. Therefore, a transfer of a part of the property or merely one segment of the business does not meet the requirement of the statute nor Ruling 81. We might also point out that the statute and Ruling 81 both require that after such a transfer, the real or ultimate ownership of the property shall be substantially similar to that which existed before the transfer. We have consistently interpreted this as requiring at least 80% similarity of ownership. We cannot determine from your letter whether the transfer in question would meet this portion of the requirement for tax exemption under Ruling 81.

F---, V--- & R---

-2-

July 23, 1953
395.1380

The transaction which you set out in your letter may not be subject to tax on another theory. If your client transferred the assets in question to a commencing corporation solely in exchange for stock and the corporation did not assume any indebtedness or other liabilities of the transferor, we would not consider the transaction as a taxable sale for the reason that the stock had no value other than that given to it by reason of the transfer of the property involved. If you have any further questions with regards to this matter, please feel free to write us. Very truly yours,

John H. Murray
Associate Tax Counsel
JHM:tj
cc:

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