Were sales of four furniture-store branches to corporations owned by the seller's shareholders exempt occasional sales?

Plain-English summary

A furniture company operated five stores in April 1950. On that date or shortly afterward, four new corporations were created and one branch was sold to each. Staff understood that consideration from each buyer consisted of cash and notes receivable.

The original company's president and vice president were shareholders in the seller and sole shareholders of all four buyers. The source does not give their ownership percentages in the seller or say they controlled it. The seller retained and continued operating its Santa Ana main office and store.

Board legal staff rejected the company's claim that the tangible personal property sold with the branches was exempt. Section 6006.5(b) required a transfer of all or substantially all property held or used in the permit-requiring activity, along with substantially similar ultimate ownership.

The property requirement failed. Staff described the retained main-store assets as substantial relative to the seller's pre-transfer total and said they remained in the same permit-requiring activity. It proposed redetermining tax without adjustment but held the petition 30 days for corrected or complete transaction facts. No later action is included.

Petition posture, four transactions, retained-store reasoning, and missing record

Assistant Counsel W. W. Mangels wrote on December 9, 1953 to M--- F--- Stores after legal staff reviewed its petition for redetermination. The seller's account and address are redacted, and a redacted Auditing recipient was copied.

The seller operated a five-store furniture business in April 1950. Four new corporations were formed on that date, or shortly thereafter, and each received one branch. The source gives no exact formation or sale date, corporate name, branch location, asset list, inventory, sale agreement, bill of sale, invoice, cash amount, note principal, note terms, liabilities, allocation, or value.

The seller's president and vice president were shareholders in the original corporation and sole shareholders of the four new corporations at transfer. Section 6006.5(b) treated shareholders as real or ultimate owners of corporate property, but the source gives no shares, percentages, classes, other seller shareholders, voting control, valuation, or continuity calculation. Staff did not decide the ownership condition because the property condition independently failed.

M--- F--- Stores retained its main office and Santa Ana store and continued operating there. Staff said the retained assets were substantial relative to total assets before transfer and continued in an activity requiring a seller's permit. It therefore concluded the branch transactions were not all or substantially all property held or used in the permit activity.

The source supplies no pre-transfer or retained-asset inventory, values, percentage calculation, main-store or branch financials, store size, inventory, fixtures, equipment, permit, customer or operational records. It does not explain whether the four branch sales were evaluated together as one transfer or as multiple sales beyond describing the retained main-store property.

Mangels only propose[d] to recommend redetermination without adjustment. If staff misunderstood, it invited complete transaction details and held the petition in abeyance for 30 days. The PDF supplies no petitioner response, corrected facts, completed staff recommendation, Board notice or order, assessment, payment, refund, appeal, collection, or later outcome.

The live annotation preserves five stores, four new corporations, one branch per buyer, buyer ownership overlap, retained main office and store, incomplete asset scope, and no occasional-sale treatment. It says the buyers' sole shareholders were also in control of the original corporation; the supporting letter says only that the president and vice president were shareholders in the seller and provides no control facts. The live entry omits the petitioner and account; April 1950 timing; furniture business; cash and notes receivable; Santa Ana location; section 6006.5(b), seller-permit activity, and substantial-relative-to-total wording; petition posture, proposed recommendation and 30-day abeyance; missing records; and absent Board outcome.

What this means for you

Multi-location retailers selling branches

Under this proposed recommendation, selling four of five locations did not qualify when the seller kept substantial main-store property operating in the same permit activity.

Accountants and tax professionals

Measure retained operating assets against the full permit activity and document how multiple branch transactions fit together. Ownership overlap did not cure the property-scope failure here.

Common questions

Q: How many stores did the company operate before the transfers?
A: Five.

Q: What did it sell?
A: Four branches, one to each newly created corporation.

Q: What did the seller retain?
A: Its main office and store, which it continued operating.

Q: What recommendation did legal staff make?
A: Staff proposed recommending redetermination without adjustment unless corrected facts changed the analysis.

Q: Did the buyer shareholders control the original company?

A: The live annotation says so, but the letter states only that the president and vice president were shareholders in the seller and sole shareholders of the buyers. It gives no seller percentages or control record.

Q: How much property did the seller retain?

A: Staff called the retained Santa Ana main-store assets substantial relative to the former total, but supplied no inventory, value, or percentage.

Q: Did the Board deny the petition?

A: The source does not say. Staff held it 30 days for more facts and supplies no final recommendation, notice, Board action, or later outcome.

Citations and references

• California Revenue and Taxation Code § 6006.5(b)
• Petition and complete transaction details — reviewed or requested but not included
• Entity, formation, shareholder, control, branch, main-store, permit, asset, value, cash, note, liability, agreement, allocation, tax, petitioner-response, Board-action, and outcome records — described or implicated but not included

Verbatim support

From the official December 9, 1953 W. W. Mangels letter:

We understand that the consideration received by you from each corporation consisted of cash and notes receivable.

It is our opinion, however, that there was not a transfer of “all or substantially all” the tangible personal property held or used in an activity for which a seller's permit is required when after the transfer assets substantial in relation to the total owned before the transfer were retained and continued in use in an activity for which a seller's permit is required, i.e. operation of the Santa Ana store.

If we have misunderstood the facts, please furnish us with the complete details relating to the transaction and we will make a further review of your petition. We will hold the petition in abeyance for thirty days.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1420
• Original supporting opinion: 395.1420 PDF

Original ruling text

395.1420

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

December 9, 1953

M--- F--- Stores
--- --- Division Office
XXXX --- Street
--- ---, California

Account No. - - XXXXX
M--- of S--- A--XXX-XX --- ----- ---, California

Gentlemen:
The legal staff has reviewed your petition for redetermination. As we understand the facts, in April 1950 you conducted a furniture business through five separate stores, but on that date, or shortly thereafter, four new corporations were created and one branch was sold to each corporation. Your president and vice president who are also shareholders in your corporation were, at the time of transfer, the sole shareholders of the four new corporations. We understand that the consideration received by you from each corporation consisted of cash and notes receivable. Your corporation continued to operate the --- --- store inasmuch as this main office was not sold. You contend that the retail sale of tangible personal property in connection with the sales of the branches to each corporation should not be subject to the tax. We are unable to agree with your contention. As we see it, the nearest possible basis for an exemption would be Section 6006.5(b) of the California Sales and Use Tax Law which defines an exempt occasional sale, in part, as any transfer of all or substantially all the property held or used by a person in the course of an activity for which a seller's permit is required when after such transfer the real or ultimate ownership of such property is substantially similar to that which existed before such transfer. For the purposes of Section 6006.5(b) stockholders are regarded as having the real or ultimate ownership of the property of a corporation. It is our opinion, however, that there was not a transfer of “all or substantially all” the tangible personal property held or used in an activity for which a seller's permit is required when after the transfer assets substantial in relation to the total owned before the transfer were retained and continued in use in an activity for which a seller's permit is required, i.e. operation of the Santa Ana store.

M--- F--- Stores

-2-

December 9, 1953
395.1420

Accordingly, we propose to recommend to the Board that the tax be redetermined without adjustment. If we have misunderstood the facts, please furnish us with the complete details relating to the transaction and we will make a further review of your petition. We will hold the petition in abeyance for thirty days. Yours very truly,

W. W. Mangels Assistant Counsel
WWM:ja
cc:

--- --- - Auditing