Could two division transfers months apart be combined to satisfy the substantially-all-assets exemption?

Plain-English summary

A corporation had operated since 1966 and changed names twice. Until 1985 it ran two divisions: A--- D--- sold doors and other building materials; M--- L--- sold kitchen cabinets and appliances.

On March 1, 1985, its board approved the latest corporate name change and a reorganization plan. Each division's assets and liabilities would move to a new corporation for stock, leaving taxpayer A--- - H--- Group as the holding company of two wholly owned subsidiaries.

The M--- L--- subsidiary, asset and stock transfers, and required filings appeared complete by June; its bill of sale was dated June 14. The A--- D--- steps extended into November, with stock transferred at an October 7 board meeting and assets treated as transferred November 1.

The memorandum treated the June and November transfers as separate. The substantially-all-property test applied immediately after each transfer, not after the whole multi-month plan.

The June step failed section 6006.5(b) only because staff expressly assumed it moved less than 80 percent of taxpayer assets. The memorandum separately said Regulation 1595(b)(4)'s contribution-to-a-commencing-corporation provision appear[ed] applicable, so it did not conclude the June transaction ultimately generated tax.

The November transfer qualified under section 6006.5(b) because staff understood all remaining taxpayer property moved and said substantially similar real or ultimate ownership was undisputed. The source supplies no tax calculation, audit action, or later outcome for either step.

1985 chronology, separate-transaction rule, assumptions, and missing record

E. L. Sorensen, Jr. sent the April 14, 1989 memorandum to the Audit Evaluation and Planning Unit, attention G. Lambert, about A--- - H--- Group and a redacted seller's-permit account. Staff had reviewed supplied materials and restated pertinent facts, but those materials are absent.

The taxpayer began business in 1966 and changed corporate names twice, most recently from A--- D--- Company to A--- - H--- Group. The source gives no incorporation, ownership, prior-name, board, or holding-company record.

Through 1985, A--- D--- sold doors and some other building materials, while M--- L--- sold kitchen cabinets and appliances. The source gives no locations, customers, inventory, equipment, permits, financials, or separate asset and liability amounts for either division.

The March 1 board plan called for two new corporations. Each would receive one division's assets and liabilities for its stock, making both wholly owned subsidiaries. The PDF gives no board minutes, reorganization plan, transfer or assumption agreements, stock terms, capitalization, ownership ledger, values, tax basis, allocation, or business purpose.

For M--- L---, creation, assets, shares and required filings appear complete by June. A June 14 bill of sale is identified but not reproduced. Sorensen treated that asset-for-stock transaction as separate from the November step and necessarily assumed less than 80 percent of A--- - H--- assets moved. No inventory, numerator, denominator, value, percentage method, or retained-property record supports that assumption.

The June step therefore missed section 6006.5(b), but Regulation l595(b)(4)—printed with a lowercase l—appeared applicable as a commencing-corporation contribution. The memorandum does not analyze the provision's elements or reach a final taxable-measure conclusion.

For A--- D---, creation, asset and share transfers, its first board meeting, and required filings were completed in November. The stock transfer occurred at an October 7 A--- D--- board meeting; the opinion identifies November 1 as the asset transfer. Staff understood all remaining A--- - H--- property moved and said ownership similarity was not disputed, so section 6006.5(b) applied under Regulation 1595(b)(2).

The source supplies no bill of sale for November, meeting record, filing, asset inventory, liability schedule, value, stock record, ownership calculation, return, audit workpaper, assessment, exemption determination, tax payment, refund, administrative action, appeal, or later outcome. It does not explain the nearly four-year gap between transactions and memorandum.

The live annotation relabels the taxpayer as Corporation A, A--- D--- as B, and M--- L--- as C. It preserves two divisions, March 1 plan, two subsidiaries, assets and liabilities for stock, holding-company result, June 14 bill of sale, October 7 board meeting, November 1 transfer, separate transactions, immediate testing, under-80-percent assumption, November remaining-property transfer, and ownership result. It omits the taxpayer's 1966 start and two name changes; division names and products; appear qualifiers and absent materials; Regulation 1595(b)(4)'s apparent alternative for June; section 6367 and Regulation 1595(b)(2); every missing record and calculation; and absence of a tax or audit outcome.

What this means for you

Businesses phasing division reorganizations

Under this memorandum, one board-approved plan did not combine legally separate division transfers completed months apart for the property test.

Accountants and tax professionals

Measure property and ownership immediately after each completed transfer, preserve each step's documents, and test separate formation rules rather than treating a failed section 6006.5(b) theory as a final tax result.

Common questions

Q: Were the two transfers combined?
A: No. The June and November steps were separate transactions.

Q: When was the substantially-all test applied?
A: Immediately after each transfer.

Q: Why did the June step fail section 6006.5(b)?
A: The memorandum necessarily assumed it transferred less than 80 percent; it supplies no supporting calculation.

Q: Why did the November step qualify?
A: It transferred all remaining property and left ultimate ownership substantially unchanged.

Q: Did staff conclude the June transfer was taxable?

A: Not finally. It rejected section 6006.5(b) on an assumption but said the commencing-corporation provision appeared applicable.

Q: What documents established the dates?

A: The source identifies a June 14 bill of sale, October 7 board meeting, November 1 transfer, and required filings, but reproduces none of those records.

Q: What was the audit or tax outcome?

A: The source supplies no audit action, assessment, exemption determination, payment, refund, appeal, or later result.

Citations and references

• California Revenue and Taxation Code §§ 6006.5(b) and 6367
• California Sales and Use Tax Regulation 1595(b)(2)
• California Sales and Use Tax Regulation 1595(b)(4) — printed as l595(b)(4) and said to appear applicable to the June step
• Supplied taxpayer materials, March 1 plan, June 14 bill of sale, October 7 board meeting, and required corporate filings — identified but not included
• Entity, name-change, division, permit, asset, liability, value, percentage, transfer, stock, ownership, filing, return, tax, audit, administrative, and outcome records — described or implicated but not included

Verbatim support

From the official April 14, 1989 E. L. Sorensen, Jr. memorandum:

In our view, the June 14, 1985 transfer of assets for stock between A--- - H--- and M--- L--- is a transaction separate and apart from the subsequent November 1, 1985 transfer of assets for stock between A--- - H--- and A--- D---.

We, therefore, are of the opinion that the requirement for a “... transfer of all or substantially all of the property ...” must be tested immediately after the transfer in order to qualify for the section 6006.5(b) exemption.

(Our conclusion necessarily assumes that less than 80% of the A--- - H--- assets were transferred on June 14, 1985). We note that the contribution to a commencing corporation·provisions of Regulation l595(b)(4) appear to be applicable to this transaction.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1525
• Original supporting opinion: 395.1525 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Audit Evaluation and Planning Unit
(G. Lambert)

From:

E. L. Sorensen, Jr.

Subject:

A--- - H--- Group
SY -- XX-XXXXXX-XXX

395.1525

Date:

April 14, 1989

We have reviewed the materials you provided concerning the subject taxpayer’s rearrangement of its business operations. Reiterated below are the pertinent facts and our opinion as to how the law should apply. Facts “Taxpayer, a corporation, has been in business since 1966. During that time, there have been two corporate name changes, the last being from ‘A--- D--Company’ to the present name [A--- - H--- Group]. “Up until 1985, taxpayer operated two divisions. A--- D--- sold doors and some other building materials; M--- L--- sold kitchen cabinets and appliances. “At its March 1, 1985 meeting, the Board of Directors approved the most recent corporate name change and a plan for reorganization. Under that plan, two new corporations would be created. The assets and liabilities of each of the two divisions, A--- D--- and M--- L---, would be transferred to the two new corporations in exchange for their stock. The result would be taxpayer as a holding company with two wholly-owned subsidiaries. “By June 1985, the creation of the new M--- L--- subsidiary, the·transfer of the assets and shares of stock, and the required filings appear to have been completed. A bill of sale transferring the assets was dated June 14, 1985. “It was not until November 1985 that the creation of the new A--- D--- subsidiary, the transfer of the assets and shares of stock, the first meeting of the new board, and the required filings had been completed. The stock transfer was accomplished at the October 7, 1985 meeting of A---’s [A--- D---’s] board.”

Audit Evaluation and Planning

-2-

April 14, 1989
395.1525

Opinion
In our view, the June 14, 1985 transfer of assets for stock between A--- - H--- and M--- L--- is a transaction separate and apart from the subsequent November 1, 1985 transfer of assets for stock between A--- - H--- and A--- D---. Revenue and Taxation Code section 6006.5(b) defines an occasional sale to include: “ (b) Any transfer of all or substantially all the property held or used by a person in the course of those activities when after the transfer the real or ultimate ownership of the property is substantially similar to that which existed before the transfer. For the purposes of this section, stockholders, bondholders, partners, or other persons holding an ownership interest in a corporation or other entity are regarded as having the ‘real or ultimate ownership’ of the property of the corporation or other entity. An occasional sale is exempt from tax (Rev. & Tax. Code § 6367). Section 6006.5(b) speaks of a transfer of property without specifying a time to test the effect of the transfer. We, therefore, are of the opinion that the requirement for a “... transfer of all or substantially all of the property ...” must be tested immediately after the transfer in order to qualify for the section 6006.5(b) exemption. Applying that standard to the A--- - H---/M--- L--transfer, leads us to conclude that the section 6006.5(b) exemption does not apply to it. (Our conclusion necessarily assumes that less than 80% of the A--- - H--- assets were transferred on June 14, 1985). We note that the contribution to a commencing corporation·provisions of Regulation l595(b)(4) appear to be applicable to this transaction. Regarding the A--- - H---/A--- D--- transfer on November 1, 1985, it appears that the section 6006.5(b) exemption would apply since our understanding is that all the remaining property of A--- - H--- was transferred and there is no dispute that real or ultimate ownership following the transfer was substantially the same as it was before the transfer (See Reg. 1595(b)(2)).

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