Was an individual's sale of a three-quarter yacht interest to a joint venture exempt because he controlled the corporations participating in the venture?

Plain-English summary

Tax Counsel said C---, an individual, appeared to transfer a personal yacht to a joint venture in two parts: a three-quarter interest sold for $67,500 and a one-quarter interest contributed as C---'s venture share. The other venture parties were three corporations for which C--- was president and majority stockholder.

Counsel concluded section 6281 did not exempt the three-quarter sale. That exemption required all or substantially all property held or used in the seller's business activity, and counsel said, as far as we can see, C--- had not held the yacht in any business activity before transferring it.

The joint-venture agreement reportedly identified the venture entity as purchaser of the three-quarter interest. Counsel therefore assigned the venture the use-tax liability with a $67,500 measure. The separate one-quarter contribution was treated as an exempt contribution to a commencing joint venture.

Qualified facts, two fractional transfers, live-annotation difference, and source limits

The one-page August 24, 1967 document is headed Occasional Sales (LTD) and Tax Counsel (RHA). It does not identify the full names, a requester, an account, a tax period, or a procedural posture.

The memorandum says C--- appears to have sold three quarters of a personal yacht to the venture for $67,500 and contributed the remaining quarter as C---'s share. It gives no transfer date, yacht description or value, consideration record, contribution value, venture percentage assigned to C---, or reason for the qualified appears wording.

C--- was president and majority stockholder of each of the three corporations described as the venture's other parties. The source gives no corporate names, exact stock percentages, corporate venture percentages, ownership chart, control agreement, or separate role for any corporation.

Section 6281 did not apply merely because C--- controlled those corporations. Counsel quoted the requirement that exempt transfers include all or substantially all of the property held or used in the course of a business activity of the person selling the property. The yacht was personal, and counsel qualified its factual finding by saying, as far as we can see, C--- did not hold it in any business activity before the sale and transfer.

For the sold three-quarter interest, the joint-venture agreement reportedly made the venture entity the purchaser. Counsel said the venture owed use tax measured by $67,500. The source provides no agreement text, invoice, payment record, registration, title, possession, situs, use, return, rate, local jurisdiction, tax amount, assessment, or payment.

For the contributed one-quarter interest, counsel stated that no tax applied because it was an exempt contribution to a commencing joint venture. The memorandum cites no separate statute, regulation, or authority for that conclusion and supplies no contribution agreement, capital account, valuation, venture-formation document, or return.

The live annotation preserves the individual, personal yacht, three-quarter sale, joint venture, presidency and majority ownership of three corporate venturers, denial of exemption, substantially-all-business-property condition, and August 24, 1967 date. It adds that after the transfer real or ultimate ownership was not substantially similar to prior ownership, a rationale the supporting memorandum does not state. It omits the $67,500 price and measure; separate one-quarter contribution and its exempt treatment; commencing-venture characterization; joint venture as purchaser and use-tax debtor; staff's appears and as far as we can see qualifications; Paper Capture source; missing records; and absent tax or later outcome.

The official PDF metadata identifies Adobe Acrobat's Paper Capture plug-in, and the page is visibly a scan with an OCR text layer. Visual review confirms the intended quoted "C" and it where the preserved extraction below reads "C 11 and i t. The source contains no case citations to submit for the scanned-ruling bulk citation check. The original text remains unchanged.

What this means for you

Yacht owners forming ventures

Under this memorandum, the sold and contributed fractional interests received different treatment. Control of the corporate venturers did not turn personal property into property held or used in C---'s business activity.

Accountants and tax professionals

Document pre-transfer use, every fractional interest, consideration, capital-account treatment, ownership before and after transfer, and the legal entity that purchased or received each interest.

Common questions

Q: Did control of the participating corporations create exemption?
A: No under counsel's view. C---'s presidency and majority stock ownership did not satisfy section 6281 when the personal yacht was not held in C---'s business activity.

Q: Who owed use tax on the three-quarter purchase?
A: The joint venture entity.

Q: What was the taxable measure?
A: $67,500 for the three-quarter interest.

Q: Was the one-quarter contribution taxable?
A: No. It was treated as an exempt contribution to the commencing joint venture.

Q: Did the source establish the exact ownership before and after transfer?

A: No. It identifies C--- as president and majority stockholder of the three corporate venturers but gives no exact corporate or venture percentages beyond the yacht fractions.

Q: Does the supporting memorandum say ultimate ownership was not substantially similar?

A: No. The live annotation adds that rationale; the memorandum itself bases its section 6281 discussion on the yacht not being held or used in C---'s business activity.

Q: Was the $67,500 the tax due?

A: No. Counsel called it the use-tax measure. The source gives no rate, jurisdiction, or computed tax.

Q: Is this a final assessment or Board decision?

A: The source does not say. It is a short Tax Counsel memorandum with no audit, assessment, hearing, Board action, payment, appeal, or later outcome.

Citations and references

• California Revenue and Taxation Code § 6281
• Joint-venture agreement — identified but not included
• Corporate, stock-ownership, venture-ownership, business-use, yacht, valuation, transfer, contribution, title, registration, payment, return, tax, assessment, Board, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official August 24, 1967 RHA Tax Counsel memorandum:

The fact that he is president and majority stockholder of the three corporations that make up the other parties to the joint venture does not, in our opinion, afford him the tax exemption under Section 6281.

C, as far as we can see, did not hold the yacht in any business activity before the sale and transfer to the joint venture.

The 1/4 interest in the yacht which he contributed as his share in the joint venture would not be subject to tax. It is an exempt contribution to a commencing joint venture.

Thus, it is the joint venture that owes use tax as a result of the sale. The measure would be $67,500.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1540
• Original supporting opinion: 395.1540 PDF

Original ruling text

395 . 1540
Occasional Sales (LTD)

Aug. 24, 1967

Tax Counsel (RHA)
"C", an individual, appears to have sold 3/4 interest in his personal yacht to a joint venture for $67,500 and to have contributed 1/4 interest in the yacht to the joint venture. The fact that he is president and majority stockholder of the three corporations that make up the other parties to the joint venture does not, in our opinion, afford him the tax exemption under Section 6281. This is because ex­ empt transfers under Section 6281 are conditioned on transferring "all or substantially all of the property held or used in the course of a business activity of the person selling the property." "C 11 , as far as we can see, did not hold the yacht in any business activity before the sale and transfer to the joint venture. The 1/4 interest in the yacht which he contributed as his share in the joint venture would not be subject to tax. It is an exempt contribution to a commencing joint ven­ ture. The joint venture agreement indicates that the purchaser of the 3/4 interest in the yacht was the joint venture entity. Thus, i t is the joint venture that owes use tax as a result of the sale. The measure would be $67,500.

RHA:dse

[lb]