Was a corporation's equipment transfer to a minority shareholder for surrender of $6,000 in stock an exempt occasional sale?

Plain-English summary

A public accountant asked whether a corporation's equipment transfer to a shareholder for that shareholder's capital stock was taxable. Tax Counsel E. H. Stetson assumed the corporation held or used the equipment in an activity requiring a seller's permit.

The apparent proposal failed both section 6006.5(b) conditions. Because the corporation would continue operating, counsel inferred it was transferring only part—not all or substantially all—of its relevant property. Real or ultimate ownership also changed because the equipment would belong to one former shareholder who had not been the major shareholder.

Surrendering the shares did not make the transfer gratuitous. The source says the stock was worth $6,000, so the corporation transferred title and possession for consideration. Counsel concluded that sales tax applied, but the PDF provides no completed transfer or tax outcome.

Two failed exemption conditions, stock consideration, and source limits

E. H. Stetson wrote on January 7, 1953 to public accountant C--- W. K---. A redacted Compliance recipient was copied. The source gives no date or copy of the incoming request, corporation, shareholder, business, account, permit, location, or equipment description.

Section 6367 supplied the occasional-sale exemption; the letter says a copy was enclosed, but that enclosure is not present. Stetson quoted section 6006.5(b) and distilled two required conditions: all or substantially all property held or used in a permit-requiring activity had to transfer, and real or ultimate ownership had to remain substantially unchanged. Stockholders were treated as the real or ultimate owners of corporate property.

Counsel expressly assumed the equipment was held or used in a permit activity. He then relied on the request's statement that the corporation would continue in business to conclude substantially all property was not moving. The source gives no total-property inventory, retained equipment, use, value, transfer percentage, or reason continued operations necessarily required retained tangible property.

For ownership, the transferred property would belong entirely to one former shareholder. The requester said that person had not been the major shareholder, but supplied no pre-transfer percentage, other shareholders, stock classes, voting or value rights, or ownership calculation. Stetson concluded the required continuity was absent.

The shareholder would surrender capital stock valued at $6,000. Stetson treated that value as consideration for transferring title and possession. The source gives no valuation date or method, shares, certificates, redemption agreement, equipment value, allocation, other consideration, liability, or accounting treatment.

The letter uses future-tense facts—the corporation is to continue and ownership will be in the former shareholder—without expressly saying whether the transaction closed. It supplies no executed agreement, title or possession record, stock cancellation, permit, return, audit, assessment, tax calculation, payment, refund, administrative action, appeal, or later outcome.

The live annotation preserves the equipment-for-stock transaction, taxable conclusion, continuing business, partial assets, and former nonmajor shareholder. It omits the accountant and counsel; assumed permit-activity use; sections 6006.5(b) and 6367; stockholders as ultimate owners; both formal exemption conditions; the $6,000 stock value; title, possession, and consideration; absent enclosure and records; apparent proposed posture; and lack of a completed transfer or outcome.

What this means for you

Corporations redeeming a shareholder with equipment

Under this letter, using equipment to redeem shares was taxable when only part of the corporate property moved and the recipient's ownership differed from the former shareholder group.

Accountants and tax professionals

Support the stock and equipment values, title and possession, complete property pool, continued operations, and exact ownership before and after the redemption.

Common questions

Q: Did the corporation transfer all its business property?
A: No. It continued operating and transferred only some equipment.

Q: Was the recipient the majority shareholder?
A: No.

Q: What consideration did the corporation receive?
A: The shareholder's surrendered stock, valued at $6,000.

Q: What was counsel's conclusion?
A: The equipment transfer was subject to sales tax.

Q: Did counsel verify seller's-permit use?

A: No. The letter expressly assumed the corporation held or used the equipment in a permit-requiring activity.

Q: How was the $6,000 stock value established?

A: The source states the value but provides no appraisal, financial statement, certificate, share count, or valuation method.

Q: Did the transfer close and produce an assessment?

A: The source does not say. It supplies no executed agreement, title or stock record, return, assessment, payment, or later outcome.

Citations and references

• California Revenue and Taxation Code §§ 6006.5(b) and 6367
• Copy of section 6367 — identified as enclosed but not included
• Request, entity, shareholder, ownership, permit, equipment, property-pool, stock, valuation, agreement, title, possession, consideration, accounting, return, tax, administrative, and outcome records — described or implicated but not included

Verbatim support

From the official January 7, 1953 E. H. Stetson letter:

Your letter indicates that neither of these factors are present in this transaction. As to the first, it is apparent that the corporation is to continue in business. Thus, substantially all of the property is not being transferred.

As to the second, the ownership of the property will be in one former stockholder who you state was not the major stockholder.

The fact that the stockholder surrendered his capital stock for the property is immaterial as that stock has a value of $6,000.00. Thus, there is a transfer of title and possession for a consideration.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1400
• Original supporting opinion: 395.1400 PDF

Original ruling text

395.1400

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

January 7, 1953

Mr. C--- W. K--Public Accountant
XXX --- --- Avenue
---, California
Dear Mr. K---:
You ask whether the sale of equipment by a corporation to a stockholder for the stockholder’s capital stock in the corporation is subject to sales tax. We assume that the corporation holds or uses the equipment in the course of an activity for which it is required to hold a seller’s permit. Section 6367 of the California Sales and Use Tax Law, copy enclosed, exempts from tax “occasional sales”. Section 6006.5(b) defines “occasional sales” as “any transfer of all or substantially all of the property used by a person in the course of such an activity (one that requires the holding of a seller’s permit) when after such transfer the real or ultimate ownership of such property is substantially similar to that which existed before such transfer”. Stockholders are considered as having the real or ultimate ownership of corporate property. You will note that Section 6006.5(b) requires two factors to exist before such a transfer is exempt: 1. the transfer must be of all or substantially all of the property held or used in an activity for which a seller’s permit is required and 2. the real or ultimate ownership must be substantially unchanged after the transfer. Your letter indicates that neither of these factors are present in this transaction. As to the first, it is apparent that the corporation is to continue in business. Thus, substantially all of the property is not being transferred. As to the second, the ownership of the property will be in one former stockholder who you state was not the major stockholder. The fact that the stockholder surrendered his capital stock for the property is immaterial as that stock has a value of $6,000.00. Thus, there is a transfer of title and possession for a consideration. It is our opinion the transfer is subject to sales tax. Very truly yours, cc:
--- – Compliance
JHM:TJ

E. H. Stetson
Tax Counsel