Was use tax due when a corporation received a sailboat through the division of a married couple's community property in divorce?

Plain-English summary

A husband and wife each held 50 percent of X's stock in their own names, while their interest in X was community property. Their divorce agreement awarded the wife all their interest in X and its debts. It awarded a 40-foot 1983 sailboat owned by X, together with the secured boat debt, to the husband through a corporation he wholly owned.

The agreement's sailboat paragraph was lined out and initialled, while an attachment directed the husband to buy the boat from X at the current loan balance and allowed a corporate purchase on his accountant's advice. X transferred the boat to the husband's corporation on the same date the court approved the agreement.

Audit staff treated the corporation-to-corporation transfer as taxable. Staff Counsel Michele F. Hicks rejected the petitioner's substantially-similar-ownership and resale arguments without full analysis but recommended relief on a different ground. She treated the transfer as the husband's involuntary receipt of his share of community property despite the corporate form, applying section 6281's real-or-ultimate-ownership rule and the Board's historical divorce-settlement policy.

Hicks recommended canceling the determination and refunding the $8,379.35 already paid. The supporting PDF supplies no final Board action or proof that the refund was issued.

Conference posture, agreement mechanics, competing grounds, contrary earlier entry, and missing record

Hicks held an Appeals conference in Sacramento on February 16, 1994. The petitioner appeared through President A, Manager B, representative C, and certified public accountant D. Senior Tax Auditor Kevin Johnson appeared for the Department. The source gives no petition number, account, audit period, conference transcript, exhibits, or party submissions.

The protested liability was measured by X's $113,252 purchase price for the vessel, and a 10-percent penalty had been added for failure to file a return. The source provides no rate, local jurisdiction, tax calculation, penalty amount, return, bill of sale, invoice, proof of the price, or determination.

The petitioner was a California corporation wholly owned by its president, A. Before petitioner existed, A was president of X, whose stock A and A's wife each held 50 percent in their own names. The source first labels the wife AA, then calls her AB throughout the agreement discussion, without explaining the redaction-label change.

The February 11, 1988 Marital Settlement Agreement divided the spouses' community assets, and the court approved it on February 17, 1989. Paragraph 2.13 awarded AB all the parties' interest in X, including all debts. Paragraph 1.10 awarded A the sailboat and its secured debt but was lined out and initialled. An attachment instead said A would buy the sailboat from X at the current loan balance and, on an accountant's advice, could buy it through a corporation. X transferred the boat to the petitioner on February 17, 1989.

The source does not reproduce the divorce petition, agreement, attachment, initials, court approval or order, community-property schedule, accountant's advice, X or petitioner records, vessel title or registration, secured loan, current balance, purchase agreement, payment, or transfer document. It also does not explain how the lined-out paragraph and attachment operated together.

The petitioner first asserted that the sailboat came through a transfer of substantially all petitioner property with substantially similar ultimate ownership. Alternatively, it said X bought the boat for resale and was a boat retailer, making X responsible for sales tax. Hicks found the evidence supported neither contention but declined a full analysis because she recommended relief on another ground. She promised a supplementary recommendation if either side appealed and more analysis became necessary; none is included.

Section 6281 exempted a vessel included in a transfer of all or substantially all business property when real or ultimate ownership remained substantially similar and treated entity interest holders as the real or ultimate owners of entity property. Hicks used that ownership rule to look through X's corporate form to the spouses' community interest.

The source quotes Annotation 395.2420, dated November 25, 1952, which treated a divorce division of two community-property sole proprietorships like a partnership distribution rather than a sale. The current official 395 collection does not expose a 395.2420 entry or supporting document, so its quoted text in this PDF is the available basis here.

The source also quotes page 20 of Board Tax Tip Pamphlet No. 23, Occasional Sales of Vehicles, Vessels, and Aircraft. It described involuntary transfers as ownership assumed because of circumstances beyond the transferee's control and listed repossession, divorce property settlement, inheritance, and an insurer's recovery of fully settled stolen property. The pamphlet itself is absent. Hicks said the Board had treated divorce-settlement ownership as an involuntary nontaxable transfer for over 40 years.

Hicks found no meaningful distinction between community ownership of a sole proprietorship and community ownership of corporate stock because section 6281 attributed real or ultimate ownership of corporate property to stockholders. The agreement listed the spouses' X interest among [a]ll other community property and characterized the overall settlement as a substantially equal community-property division. Hicks therefore treated the vessel, subject to its loan balance, as A's share and the transfer as involuntary.

The current collection also publishes Annotation 395.0081, dated November 22, 1993, with a supporting Tax Counsel memorandum. It describes a materially matching sequence—spouses each owning half of a corporation, a divorce-directed vessel purchase at the current loan balance, and the husband's wholly owned corporation as buyer—but concludes that one corporation made a taxable sale to another and no community property passed directly to the husband. The July 1994 recommendation does not cite 395.0081 or expressly call itself a reversal, so this page reports the opposing official analyses without claiming a formal modification or supersession.

The live 395.1578 annotation says the spouses were each awarded 50 percent of the corporation's net assets. The supporting recommendation instead says AB received all interest in X, A received the sailboat and secured debt through petitioner, and the agreement described the overall community division as substantially equal. The live entry preserves equal stock ownership, corporate community property, divorce, ultimate-ownership continuity, exemption, and July 28, 1994 date. It omits the conference and participants; vessel description, price, penalty, payment and recommended refund; agreement dates and mechanics; the lined-out paragraph, attachment and loan balance; petitioner's rejected arguments; section 6281, Annotation 395.2420 and Tax Tip No. 23; contrary 1993 entry; missing records; and absent final Board action.

The PDF supplies no supplementary recommendation, reconsideration, Board hearing or minutes, final decision, canceled assessment, refund authorization or payment, collection record, judicial appeal, or later outcome.

What this means for you

Owners dividing a closely held business in divorce

Under this staff recommendation, corporate form did not prevent applying the spouses' underlying community-property division. A separate earlier official entry analyzed a materially matching corporate transfer differently, so current advice is essential.

Accountants and tax professionals

Preserve the complete settlement, amendments, court order, entity and stock records, vessel title, secured debt, purchase terms, payment, and allocation of the entire community estate. Distinguish a direct property division from a separate entity sale.

Common questions

Q: What property was disputed?
A: A 40-foot 1983 sailboat with a $113,252 purchase price used as the measure of the protested liability.

Q: Why was the corporate-to-corporate transfer not taxed?
A: The recommendation treated it as the husband's receipt of his share of community property through an involuntary divorce settlement.

Q: Did the Appeals section accept the petitioner's original arguments?
A: No. It rejected them but recommended relief on the separate community-property ground.

Q: What relief was recommended?
A: Cancel the determination and refund the $8,379.35 already paid.

Q: Was that refund actually paid?

A: The source does not say. It provides only the recommendation, with no final Board action, cancellation record, or refund payment.

Q: What did the divorce agreement award to each spouse?

A: The recommendation says the wife received all interest in X and its debts, while the husband received the sailboat and secured debt through his corporation; it also quotes the agreement's description of the overall division as substantially equal.

Q: Why is Annotation 395.0081 important?

A: That November 1993 official entry describes a materially matching sequence but treats it as a taxable corporation-to-corporation sale. The 1994 recommendation reaches the opposite community-property result without formally identifying or superseding that entry.

Q: Did the source fully decide the petitioner's substantially-all or resale arguments?

A: No. Hicks rejected both for lack of supporting evidence but withheld a full analysis because she recommended relief on another ground.

Citations and references

• California Revenue and Taxation Code § 6281
• California Sales and Use Tax Annotation 395.2420 (November 25, 1952) — quoted in the source; no current separate official entry or supporting document exposed
• Board Tax Tip Pamphlet No. 23, Occasional Sales of Vehicles, Vessels, and Aircraft, page 20 — quoted in part but not included
• California Sales and Use Tax Annotation 395.0081 (November 22, 1993), with official supporting memorandum — materially matching sequence and opposing analysis; no formal cross-reference in 395.1578
• Marital Settlement Agreement, attachment, court approval or order, accountant advice, audit and determination — described or quoted but not included
• Community-property, corporate, stock, vessel, title, debt, current-balance, purchase, payment, transfer, return, tax, penalty, conference, supplementary-recommendation, Board, refund, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official July 28, 1994 Michele F. Hicks Decision and Recommendation:

I find that the evidence presented does not support either one of petitioner's contentions. However, because I believe that petitioner should prevail on another ground, for the sake of brevity, I will not expand on my rejection of petitioner's contentions.

The fact that the business was incorporated should make no difference in the tax outcome. Revenue and Taxation Code Section 6281 specifically provides that stockholders in a corporation are regarded as having "real or ultimate ownership" of the property of the corporation.

This is a case of a husband taking his share of the community property.

Cancel the determination. Refund the $8,379.35 that petitioner has already paid.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1578
• Original supporting opinion: 395.1578 PDF

Original ruling text

STATE OF CALIFORNIA

395.1578

BOARD OF EQUALIZATION
BUSINESS TAXES APPEALS REVIEW SECTION

In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of
---Petitioner

)

Petitioner

)
) DECISION AND RECOMMENDATION
)
)
No. --)
)
)
)

The Appeals conference in the above-referenced matter was held by Staff Counsel Michele F. Hicks on February 16, 1994 in Sacramento, California.

Appearing for Petitioner:

A
President
B
Manager
C
Taxpayer's Representative
D
Certified Public Accountant

Appearing for the
Sales and Use Tax Department:

Mr. Kevin Johnson
Senior Tax Auditor

Protested Item
The protested tax liability is measured by $113,252, the purchase price of a vessel.

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395.1578

A 10 percent penalty was added for failure to file a return. Petitioner's Contentions

1. The sailboat was acquired in a transfer of substantially all of the property of a
   corporation and the ultimate ownership of the property is substantially similar to that which existed before the transfer.
2. The sailboat was originally purchased for resale and the seller was a retailer of
   boats. Therefore the seller is liable for sales tax on the transaction. Summary
   ---Petitioner is a California corporation wholly owned by its President, A. Prior to forming petitioner, Mr. A was the President of X. X was owned 50 percent by Mr. A and 50 percent by AA, his wife. X owned a 40-foot 1983 -- sailboat, "Y". Mr. A petitioned for divorce and on February 11, 1988, the parties signed a Marital Settlement Agreement (hereafter "Agreement"). The Agreement was approved by the court on February 17, 1989. The Agreement provides for the division of A and AB’s community assets. Paragraph 2.13 awards AB all of the interest of the parties in X including all debts. Paragraph 1.10 awards A the sailboat together with all debts secured by the boat. Paragraph 1.10 is lined out and initialled by the parties. An attachment to the Agreement states that Mr. A shall buy the sailboat from X at the current loan balance and that based on his accountant's advice, Mr. A may purchase the boat through a corporation. X transferred the boat to ---Petitioner on February 17, 1989. The audit staff contends that this was a sale of the boat from one corporation to another and therefore is a taxable transaction. Petitioner contends that the sailboat was acquired in a transfer of substantially all of ---Petitioner's property and the ultimate ownership of the property is substantially similar to that which existed before the transfer. Alternatively, petitioner contends that the boat was originally purchased for resale and X was a retailer of the boat. Therefore, when X sold the boat to ---Petitioner, it was a sales tax transaction and tax should be assessed against X. Analysis & Conclusion I find that the evidence presented does not support either one of petitioner's

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July 28, 1994
395.1578

contentions. However, because I believe that petitioner should prevail on another ground, for the sake of brevity, I will not expand on my rejection of petitioner's contentions. If, after reading the analysis and conclusion stated in this Decision and Recommendation, either side appeals my recommendation and further discussion of these two contentions becomes necessary, I will give a full analysis in a Supplementary Decision and Recommendation. Revenue and Taxation Code Section 6281 provides that the gross receipts from the sale of and the storage, use, or other consumption of a vessel are exempt when the vessel is included in any transfer of all or substantially all the property held or used in the course of the business activities of the person selling the property, when after such transfer the real or ultimate ownership of such property is substantially similar to that which existed before the transfer. For the purposes of Section 6281, "stockholders, bondholders, partners, or other persons holding an interest in a corporation or other entity are regarded as having the real or ultimate ownership' of the property of that corporation or other entity". Business Taxes Law Guide Annotation 395.2420 states: "Property Settlement, Example of Particular Non-taxable. Taxpayer owned and operated two places of business under his own name. The businesses were held by the taxpayer as community property with his wife. Upon a divorce and property settlement the husband took one of the businesses as his separate property and the wife took the other business as her separate property. "It is our opinion that this transaction should be regarded as analogues to a distribution of the assets of a partnership upon a dissolution. While the ownership of community property by husband and wife is not strictly speaking a partnership, it resembles a partnership in some ways and for sales tax purposes we feel that a splitting up of the community property should not be regarded as a sale." (11/25/52) The Board's Tax Tip Pamphlet No. 23 "Occasional Sales of Vehicles, Vessels, and Aircraft" states on page 20: "C. Involuntary Transfers - Not Subject to Use Tax "Aninvoluntary transfer' might be defined as a transfer in which a transferee, because of circumstances beyond their (sic) control, assumes ownership. Such transfers would include but would not necessarily be limited to:

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July 28, 1994
395.1578

"a. Repossession by a finance company.
"b. Ownership as a result of a property settlement in a divorce. "c. Inheritance from an estate. "d. Recovery of stolen property for which an insurance company has made a full settlement to the insured owner. Upon recovery, the insurance company would assume ownership without use tax liability." It has been the Board's position for over forty years that ownership as a result of a property settlement in a divorce is an involuntary transfer not subject to tax. In the present appeal, the audit staff has deviated from this long-standing position because the transfer technically occurred between two corporations and not the individuals themselves. We do not believe that this distinction should make a difference. In Annotation 395.2420 quoted above, the taxpayer owned two businesses in his own name, but the businesses were community property. The Board allowed the tax free transfer of one business to his wife as separate property and the other to the taxpayer as separate property. The rationale for this decision was "for sales tax purposes we feel that the splitting up of the community property should not be regarded as a sale". In the present appeal, A and AB each held 50 percent of the stock of X in their own names, but it was community property. In the Marital Settlement Agreement, their interests in X are included in a list designated as "[a]ll other community property owned by the parties...." Further, the last sentence of the Agreement states that "[t]he parties agree that this is a substantially equal division of their community property...." Thus the parties' interest in --- was listed in the Agreement as a community asset to be divided in the divorce. X was a business owned as community property by a husband and a wife, just as the businesses described in Annotation 395.2420. The fact that the business was incorporated should make no difference in the tax outcome. Revenue and Taxation Code Section 6281 specifically provides that stockholders in a corporation are regarded as having "real or ultimate ownership" of the property of the corporation. Under this provision, there is no meaningful distinction between a sole proprietor who owns a business as community property and a husband and wife who own their corporation as community property. Section 6281 provides that the latter have "real or ultimate ownership" of the business property just as the former does. The sailboat was awarded to petitioner as a result of a property settlement in a divorce. The transfer was involuntary. Petitioner took the sailboat subject to the secured debt

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395.1578

(i.e., the loan balance) just as AB and A took much of the rest of the community property awarded to each of them. This is a case of a husband taking his share of the community property. As stated in Annotation 395.2420, "for sales tax purposes we feel that the splitting up of the community property should not be regarded as a sale". Petitioner has already paid $8,379.35 on this determination. We recommend that the determination be canceled and the $8,379.35 be refunded to petitioner. Recommendation Cancel the determination. Refund the $8,379.35 that petitioner has already paid.

__________
MICHELE F. HICKS, STAFF COUNSEL

7/28/94
_________
DATE