Were a subsidiary's liquidation into its parent and the parent's immediate transfer of those assets to another subsidiary both exempt?

Plain-English summary

Corporation A wholly owned subsidiaries B and C. Freight transportation was the principal business of all three, and each held a seller's permit for sales of miscellaneous equipment. The proposal was to dissolve B, distribute all its assets to A in complete liquidation, and immediately move those same assets from A to C.

Assistant Counsel Bill Holden said B's all-asset distribution to A was clearly exempt under Ruling 81's last paragraph because real or ultimate ownership did not change. But moving only the former B assets from A to C failed the all-or-substantially-all test. For that exemption, A would have needed to transfer its preexisting assets too.

The second step still could be nontaxable if it was not a sale. A capital contribution for which A received no stock, notes, other consideration, or C liability assumption would not be taxable. If A received consideration, tax applied to the portion paid for tangible personal property. The source does not identify any asset, liability, value, transfer document, or completed outcome.

Proposed two-step transaction, alternative treatment, and missing record

Bill Holden wrote on January 11, 1955 to L---, H--- and H---, certified public accountants, responding to their October 27, 1954 letter. A redacted Auditing recipient was copied. The incoming letter is not included.

The source uses only anonymous corporate labels. A wholly owned B and C. All three principally transported freight, and each held a seller's permit connected with sales of miscellaneous items of equipment. The PDF gives no corporate jurisdiction, organizational chart, stock record, freight operation, location, equipment, sale history, permit, or relationship beyond full ownership.

B would dissolve and distribute all assets to A in complete liquidation. Ruling 81's last paragraph clearly exempted that step because every B asset moved and real or ultimate ownership did not change. The source does not reproduce Ruling 81 or identify B's assets, liabilities, values, shares, liquidation plan, distributions, consideration, or dissolution documents.

A would then transfer those assets forthwith to C. Ruling 81 did not exempt that step because A would transfer the former B property without also transferring A's preexisting assets. The letter identifies none of A's property, its use, value, permit activity, retained share, or the former B assets' share of the resulting pool.

Holden separately considered whether the A-to-C step could be outside the definition of a sale. If A contributed the assets to capital without receiving stock, notes, or any other consideration, no taxable sale occurred. He emphasized that C's assumption of liabilities would itself be consideration received by A.

If consideration existed, tax applied only to the portion attributable to tangible personal property. The source gives no stock, note, consideration, assumed-liability amount, tangible or nontangible property, value, allocation, rate, or tax calculation. It does not say whether the contribution and ownership effects of receiving no additional stock were documented.

The PDF supplies no October 27 request, entity identities, corporate and ownership records, permits, equipment-sales history, asset inventories, liquidation or transfer agreements, dissolution filing, capital records, stock or note terms, liability schedules, valuations, allocation, completed steps, return, audit, assessment, payment, refund, administrative action, appeal, or later outcome.

The live annotation preserves A's ownership of B and C, same principal business, permits, B liquidation, immediate onward transfer, first-step exemption, second-step property-scope failure, capital-contribution alternative, consideration condition, and tangible-property portion. It omits the accountants and October 27 request; freight transportation and permits specifically for miscellaneous-equipment sales; Ruling 81 and its last paragraph; no change in real or ultimate ownership; A's preexisting assets; stock, notes and liability assumption as specific consideration; all missing records; and absence of completed transactions or a tax outcome.

What this means for you

Corporate groups moving subsidiary assets

Under this letter, an exempt complete liquidation into a parent did not carry over to the parent's separate onward transfer of only those received assets.

Accountants and tax professionals

Identify stock, notes, debt assumption and every other form of consideration. Compare the assets moved with the parent's entire relevant property pool after liquidation.

Common questions

Q: Was B's complete liquidation into A exempt?
A: Yes, under the letter's application of Ruling 81.

Q: Why was A's onward transfer to C different?
A: A proposed transferring only the former B assets, not all or substantially all assets A held after the liquidation.

Q: Could the second transfer avoid being a sale?
A: Yes, if it was a capital contribution and A received no consideration.

Q: Did an assumption of liabilities count as consideration?
A: Yes.

Q: What did the corporate group do for business?

A: All three principally transported freight and held seller's permits for miscellaneous-equipment sales.

Q: Which A assets had to accompany the former B assets?

A: The letter says all A assets, including its preexisting property, but identifies no item, use, or value.

Q: Did either proposed transfer occur?

A: The source supplies no liquidation plan, transfer agreement, dissolution, capital record, return, assessment, or later outcome.

Citations and references

• California State Board of Equalization Ruling 81, as quoted and applied in the letter
• October 27, 1954 C.P.A. letter — identified but not included
• Entity, ownership, freight, permit, equipment-sale, asset, liquidation, dissolution, capital, stock, note, liability, consideration, value, allocation, return, tax, administrative, and outcome records — described or implicated but not included

Verbatim support

From the official January 11, 1955 Bill Holden letter:

The transfer from B to A will clearly be exempt pursuant to the last paragraph of Ruling 81 in that there is no change in the real or ultimate ownership and the transfer is of all the assets.

To fall within this exemption there would have to be transferred from A to C all the assets of A including those received from B and those held before acquiring the assets of B.

You should particularly note the fact that an assumption of liabilities by C would be regarded as consideration received by A.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1520
• Original supporting opinion: 395.1520 PDF

Original ruling text

395.1520

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

January 11, 1955
L---, H--- and H--Certified Public Accountants
XXX --- Street
--- --- X, California

Your letter of October 27,
1954

Gentlemen:
You present a sales tax problem in which A corporation has two wholly owned subsidiary corporations, B and C. The principal business of the three corporations is the transportation of freight. Each corporation holds a seller’s permit in connection with sales of miscellaneous items of equipment. It is contemplated that B will be dissolved and all of its assets distributed to A in complete liquidation. These assets will forthwith be transferred by A to C. The transfer from B to A will clearly be exempt pursuant to the last paragraph of Ruling 81 in that there is no change in the real or ultimate ownership and the transfer is of all the assets. Ruling 81 does not, however, appear to exempt the transfer from A to C because the transfer is not of “all or substantially all the property held or used in the course of an activity for which a seller’s permit is required.” To fall within this exemption there would have to be transferred from A to C all the assets of A including those received from B and those held before acquiring the assets of B. It is possible, of course, that the transfer from A to C is not a “sale”. Thus, if the transfer were made as a contribution to capital and if A did not receive stock, notes, or any other consideration, there would be no sale and the transfer would not be taxable. To the extent that A receives shares of stock, notes, or any other consideration, the transfer is taxable. You should particularly note the fact that an assumption of liabilities by C would be regarded as consideration received by A. Assuming A has received consideration for the transfer, tax will apply on the portion of the consideration received which is for the transfer of tangible personal property. Yours very truly,

Bill Holden
Assistant Counsel
BH:ja
Cc:
--- --- - Auditing