Did transferring all assets of one selling activity qualify under section 6006.5(b) when the same corporation retained a separate textile manufacturing plant?

Plain-English summary

Two corporations proposed a statutory merger and related transactions. After F--- I---, Inc. received P--- C--- O--- Co.'s assets in the merger, F--- would transfer all those assets to a newly formed corporation for its stock. The new corporation would assume P--- liabilities existing at merger.

Most F--- operations were conducted through subsidiaries, but F--- directly owned a textile manufacturing plant in redacted-city, Georgia. P---'s separate activity included cotton ginning. Staff concluded the new-corporation transfer would be taxable on a pro rata basis because moving only P--- assets left F---'s textile property behind.

The relevant distinction under staff's reading of section 6006.5(b) was between permit-requiring and non-permit activities—not between two distinct permit-requiring businesses. Substantially all property used across every permit-requiring activity had to be included.

The letter suggested a possible alternative: after merger, transfer P--- assets to one subsidiary and the textile plant and other property to another, all in a single transaction, while ownership remained substantially the same. Counsel said that would produce an occasional sale but warned that taxes imposed by other states such as Georgia still required consideration. The source does not show that either structure occurred.

Continuing advice, rejected structure, suggested alternative, and missing record

Associate Tax Counsel Richard H. Ochsner wrote on September 27, 1966 to T---, M---, J--- & B---, attention F--- H. L---, about F--- I---, Inc. and P--- C--- O--- Co. Their account numbers are redacted. Hollywood and Fresno district administrators were copied.

The PDF is one piece of a longer advice record. Ochsner considered additional information and arguments in September 8 and September 19 letters and said staff's position remained unchanged from a September 1 letter. He referred to a September 23 telephone conversation and an alternative in the original August 22 letter. None of those letters or the call record is included.

The proposed first step was a statutory merger between F--- and P---. The source implies F--- would hold the merged assets afterward but gives no jurisdiction, merger statute, agreement, certificate, effective date, stock or other merger consideration, ownership, liabilities, surviving-entity provision, or tax treatment of the merger itself.

Next F--- would transfer all assets received from P--- to a newly formed corporation for stock. The new entity would assume P--- liabilities existing at merger. Ochsner said tangible personal property in that transfer would be taxable on a pro rata basis, but he provided no asset categories, total or taxable values, allocation, assumed-liability amount, ratio, rate, jurisdiction, or calculation.

The taxpayer argued that all property in P---'s separate cotton-ginning activity would move. Staff rejected that activity-by-activity approach. Under its long-held interpretation of section 6006.5(b) and Ruling 81, every permit-requiring activity belonged in the same property scope. F--- retained a directly owned Georgia textile plant, so substantially all permit-activity property was not moving.

The source says most of F---'s operations occurred through subsidiaries, but identifies no subsidiary, other operation, plant property, cotton-ginning property, permit, location beyond Georgia, asset use, value, retained-property share, or substantially-all percentage.

Ochsner's alternative relied on California Tax Service Annotation 1621.15 for the premise that property could go to more than one entity if ownership remained substantially the same. After merger, F--- could transfer P--- assets to one subsidiary and the textile plant etc. to another, all as one transaction. The historical annotation's text, date, source opinion, and facts are not reproduced. The letter gives no recipient identities, ownership percentages, transaction instrument, consideration, liabilities, allocation, business purpose, or confirmation that the structure met every condition.

The alternative also raised possible taxes imposed by states such as Georgia. The source quotes no Georgia or other-state law and reaches no non-California conclusion. It supplies no later restructuring choice, completed merger or transfer, returns, audit, assessment, payment, refund, administrative action, appeal, or outcome.

The live annotation preserves the cross-activity substantially-all rule and the separate-selling-business rejection. It omits all parties and dates except September 27, 1966; the merger, new corporation, stock, assumed liabilities, and pro-rata tax conclusion; P--- cotton ginning, F--- subsidiaries, and Georgia textile plant; the taxpayer's argument; Ruling 81; all five prior communications; Annotation 1621.15 and the two-subsidiary alternative; other-state tax warning; missing records; and absence of a completed restructuring or outcome.

What this means for you

Corporations with multiple selling businesses

Under this letter, treating operations as separate selling businesses did not let one business alone satisfy the substantially-all-property rule.

Attorneys and tax professionals

Inventory property across all permit-requiring activities, quantify consideration and retained assets, document ownership across recipients, and analyze every affected jurisdiction.

Common questions

Q: Were cotton ginning and textile manufacturing treated as separate for this test?
A: Not in the way the taxpayer proposed. Both were permit-requiring activities whose property counted.

Q: Why did the planned new-corporation transfer fail?
A: The corporation would retain its textile plant rather than transfer substantially all property used in permit activities.

Q: Could property go to more than one entity?
A: Yes, the letter said multiple simultaneous transferees could work if ownership remained substantially the same.

Q: Did the letter guarantee the alternative was tax-free everywhere?
A: No. It specifically warned about possible taxes imposed by other states such as Georgia.

Q: What did tax on a pro rata basis mean here?

A: The source gives no ratio, asset values, liability amount, allocation, rate, or calculation, so it does not establish the proposed tax measure.

Q: Was the textile plant operated through a subsidiary?

A: No on the source's wording. It said most operations used subsidiaries but that F--- itself owned the Georgia plant.

Q: What did California Tax Service Annotation 1621.15 say?

A: This letter cites it for allowing property to move to more than one entity if ownership remains substantially the same, but does not reproduce its text or underlying opinion.

Q: Which structure was completed?

A: The source supplies no merger, transfer, return, assessment, or later outcome for either proposal.

Citations and references

• California Revenue and Taxation Code § 6006.5(b)
• California State Board of Equalization Ruling 81
• California Tax Service Annotation 1621.15 — cited for multiple transferees with substantially unchanged ownership; text and supporting opinion absent
• August 22, September 1, September 8, and September 19, 1966 letters and September 23 telephone conversation — identified but not included
• Entity, subsidiary, ownership, merger, asset, location, permit, stock, liability, value, allocation, calculation, alternative-transaction, multistate-tax, return, administrative, and outcome records — described or implicated but not included

Verbatim support

From the official September 27, 1966 Richard H. Ochsner letter:

We have long been of the opinion, however, that the distinction between activities contemplated by § 6006.5 relates solely to the distinction between activities for which a seller’s permit would be required and those activities for which a seller’s permit would not be required.

Property used in activities for which a seller’s permit would be required may be transferred to more than one entity so long as the ownership of such property remains substantially the same. (California Tax Service, annotation number 1621.15.)

There is, of course, the possible complication of taxes imposed by other states, such as Georgia, which would have to be considered.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1480
• Original supporting opinion: 395.1480 PDF

Original ruling text

395.1480

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

September 27, 1966

T---, M---, J--& B--Attorneys at Law
--- --- --- Street
--- ---, CA XXXXX
Attention:

Mr. F--- H. L---

SR -- XX XXXXXX
F--- I---, Inc.
SY -- XX XXXXXX
P--- C--- O--- Co.

Gentlemen:
This is in reply to your letter of September 8, 1966, submitting additional information and argument with regard to a proposed statutory merger and related transactions between F--- I---, Inc. and P--- C--- O--- Co. After carefully considering this information, together with the information submitted in your letter of September 19, we find that our position as to the application of California sales and use taxes to the transactions in question remains unchanged from that stated in our letter to you of September 1. With reference to the situation where, after the statutory merger between F--- and P---, F--transfers all of the assets received from P--- to a newly formed corporation in exchange for the stock of the new corporation and the new corporation assumes liabilities of P--- existing at the time of the merger, we believe that the transfer of tangible personal property to the new corporation would be subject to tax on a pro rata basis. As I explained to you in our telephone conversation of Friday, September 23, we do not believe that the transfer of assets to the new corporation would qualify as an occasional sale within the meaning of § 6006.5(b) of the California Sales and Use Tax Law. Section 6006.5(b), as interpreted by ruling 81, requires 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. You state that, while most of F---’s operations are conducted through subsidiary corporations, it owns a textile manufacturing plant in
---, Georgia. It appears, therefore, that not all, or substantially all, of the property used in an activity for which a seller’s permit is required would be transferred to the new corporation, thus the transfer would not qualify as an occasional sale.

T---, M---, J--& B--- (SR -- XX XXXXXX
and SY -- XX XXXXXX)

-2-

September 27, 1966
395.1480

You have suggested that the transfer of the property received from P--- should qualify as an occasional sale because those assets relate to an activity which is separate and distinct from F---’s textile plant and, therefore, all of the property used in P---’ particular activity (cotton ginning, etc.,) would have been transferred. We have long been of the opinion, however, that the distinction between activities contemplated by § 6006.5 relates solely to the distinction between activities for which a seller’s permit would be required and those activities for which a seller’s permit would not be required. In order to qualify as an occasional sale, all, or substantially all, of the property held or used in any activity for which a seller’s permit would be required must be transferred. As an added thought, let me suggest a method of handling the F--- - P--- transaction which may not have occurred to you. Property used in activities for which a seller’s permit would be required may be transferred to more than one entity so long as the ownership of such property remains substantially the same. (California Tax Service, annotation number 1621.15.) If, following the statutory merger, F--- transferred the assets received from P--- to one subsidiary and the textile plant, etc., to another subsidiary, all as a single transaction, an occasional sale would result. This alternative might prove more feasible than the one outlined in your original letter of August 22, 1966. There is, of course, the possible complication of taxes imposed by other states, such as Georgia, which would have to be considered. Very truly yours,

Richard H. Ochsner
Associate Tax Counsel

RHO:mm
cc:

Hollywood – District Administrator
Fresno – District Administrator