Would tax apply when a sole proprietor transferred all tax-paid rental equipment to a wholly owned corporation and the corporation continued the leases?

Plain-English summary

A sole proprietor operated an off-road construction-equipment leasing business. The equipment was acquired tax-paid and leased to related entities in substantially the same form, so the proprietor treated the leases as neither sales nor purchases and held no seller's permit.

For legal-liability reasons, the proprietor proposed contributing every sole-proprietorship asset, subject to liabilities, to an existing shell corporation also owned 100 percent by the proprietor. The quoted request first calls the step planned, then says it was accomplished before December 31, 199X, without resolving the timing.

Senior Tax Counsel Ronald L. Dick concluded that the equipment transfer was an exempt occasional sale under sections 6006.5(a) and 6367 if the proprietor truly was not required to hold a seller's permit in the lease business.

The corporation's continued leases also were outside tax under Regulation 1660(b)(1)(E). It received all tangible personal property used in the leasing activity, ownership remained substantially the same, and the equipment had been acquired tax-paid and remained in substantially the same form. The source supplies no completed-transfer evidence or later tax outcome.

Source assumptions, two tax questions, timing conflict, and missing record

Dick's April 15, 1994 letter responds to a redacted representative's January 7 request regarding both the transfer and subsequent leases. It identifies the sole proprietor once as M--- F--- and the corporation as C--- E---, Inc. and later C--- E--- Company. The request and any entity records are absent.

The taxpayer leased off-road construction equipment to unidentified related entities. Dick expressly assumed off-road meant no vehicle required registration under the Vehicle Code. The source gives no equipment list, make, model, title, registration analysis, location, related entity, lease, rental amount, use, or property condition.

The equipment reportedly was acquired tax-paid. Dick understood that the proprietor leased it in substantially the same form as acquired and either paid sales-tax reimbursement or timely paid use tax measured by purchase price. Sections 6006(g)(5) and 6010(e)(5) supported treating those leases as neither sales nor purchases. The source supplies no invoices, tax reimbursement, use-tax return or payment, purchase price, acquisition dates, alteration records, or lease tax reporting.

The quoted request calls the contribution a plan, then immediately says it was accomplished before December 31, 199X; it later says the equipment will continue to be leased. No exact year, execution date, formation record, asset transfer, closing, or explanation of the mixed future and past tense is included.

Every sole-proprietorship asset would move to an existing shell corporation, subject to its liabilities, for legal-liability reasons. The same individual owned 100 percent before and after. The source gives no non-equipment assets, creditors, liability types or amounts, consideration, assumption agreement, corporate capitalization, board action, business-purpose evidence, asset values, or ownership documents.

For the first question, section 6006.5(a) included a sale of property not held or used in activities requiring a seller's permit within occasional sale, and section 6367 exempted an occasional sale of tangible personal property. Dick therefore conditioned exemption on the proprietor truly not being required to hold a seller's permit. The letter does not independently verify that premise or address another permit-requiring activity.

For the second question, Regulation 1660(b)(1)(E) excluded certain leases of tax-paid property in substantially the same form after an all-or-substantially-all transfer from a nonpermit activity with substantially similar ownership. Dick applied that exclusion because the corporation would acquire all leasing-activity tangible property and the owner remained the same. The source does not quantify all, identify retained property, or document post-transfer ownership.

The live annotation preserves the sole proprietorship, all-asset contribution subject to liabilities, shell corporation, legal-liability reason, common 100-percent owner, related-entity leases, off-road registration assumption, tax-paid same-form property, lack of a seller's permit, occasional-sale exemption, continued-lease exclusion, all-activity-property and substantially-similar-ownership conditions, cited authorities, and April 15, 1994 date. It adds that the transfer was subject to lessees' rights, which the supporting letter does not state in those words. It omits the January 7 request; mixed planned-versus-accomplished wording and redacted deadline; truly permit qualification; missing records; and lack of any transfer, lease, tax, or outcome evidence.

The PDF supplies no response, corrected facts, equipment or liability schedule, permit determination, executed transfer, corporate or lease record, tax return or payment, audit, assessment, refund, administrative action, appeal, or later outcome.

What this means for you

Sole proprietors incorporating a rental business

Under this letter, prior tax payment and common ownership were not the only conditions. The equipment had to remain substantially unchanged, the leasing activity had to require no seller's permit, and all or substantially all activity property had to move.

Accountants and tax professionals

Document each item's acquisition tax, condition, registration status, leases and lessees, permit analysis, liabilities and consideration, complete activity-property scope, and ownership before and after transfer.

Common questions

Q: Why was the transfer to the corporation exempt?
A: Assuming no seller's permit was required for the proprietor's leasing activity, the transfer qualified as an occasional sale under sections 6006.5 and 6367.

Q: Did assumed business liabilities make the later leases taxable?
A: The letter did not treat them as doing so on the stated facts, but gives no liability type, amount, assumption agreement, or analysis of their role as transfer consideration.

Q: Why were the corporation's leases excluded from tax?
A: The corporation acquired all activity property, the equipment was tax-paid and substantially unchanged, and ownership remained substantially the same.

Q: Did the letter cover registered vehicles?
A: No. It expressly assumed the off-road equipment was not required to be registered under the Vehicle Code.

Q: Did counsel verify that no seller's permit was required?

A: No. He relied on the stated tax-paid, same-form lease treatment and expressly conditioned the transfer result on the proprietor truly having no permit requirement.

Q: Had the contribution already occurred?

A: The source conflicts. It calls the step planned but also says it was accomplished before December 31 of a redacted year. No execution record or exact date resolves that.

Q: What equipment and liabilities transferred?

A: The source says all sole-proprietorship assets subject to liabilities, but supplies no item, value, creditor, amount, agreement, or retained-property schedule.

Q: What was the later outcome?

A: None is supplied. The PDF contains advice only, with no transfer confirmation, lease reporting, audit, assessment, payment, appeal, or later result.

Citations and references

• California Revenue and Taxation Code §§ 6006(g)(5), 6006.5(a), 6010(e)(5), and 6367
• California Sales and Use Tax Regulation 1660(b)(1)(E)
• January 7, 1994 request — substantially quoted but not reproduced separately
• Equipment, registration, purchase, tax-payment, lease, related-entity, permit, asset, liability, ownership, corporate, transfer, return, audit, assessment, payment, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official April 15, 1994 Ronald L. Dick letter:

Assuming that Mr. F--- is truly not required to hold a seller's permit in the course of his lease business, the sale of the equipment to the corporation is an occasional sale as defined in subdivision (a) of 6006.5, and the sale is exempt from sales tax under Section 6367.

The lease will qualify for the exclusion if the property is acquired in a transfer of all or substantially all of the tangible personal property held or used by the transferor in an activity or activities not requiring the holding of a seller's permit and the ownership of the tangible personal property is substantially similar after the transfer.

Given that C--- E--- Company will acquire the equipment in a transfer of all of the tangible personal property held or used by M--- F--- in his lease activities and the ownership is substantially the same after the transfer, tax does not apply to the leases of the equipment by C--- E---.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1585
• Original supporting opinion: 395.1585 PDF

Original ruling text

395.1585

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

April 15, 1994

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Mr. E--- -. S--K--- P--- M----- --- Center
--- ---, CA XXXXX
Dear Mr. S---:
This is in reply to your January 7, 1994 letter regarding the application of sales and use tax to the sale and subsequent lease of off-road construction equipment under the following facts you provided: "The Taxpayer operates an off-road construction equipment lease business as a sole proprietor. The equipment utilized in this business was acquired tax-paid. Subsequent rentals to related entities were not subject to tax. "The Taxpayer is planning to contribute all of the assets of the sole proprietorship, subject to its liabilities into an existing shell corporation for legal liability reasons. This was accomplished before December 31, 199X by the Taxpayer contributing 100% of the sole proprietorship's assets into an existing corporation (C--- E---, Inc.) which is also owned 100% by the Taxpayer. The equipment will continue to be leased to related entities." By your reference to "off-road" construction equipment, we assume you mean the equipment does not consist of vehicles required to be registered under the Vehicle Code. We understand that M--- F--- does not hold a seller's permit, because his leases of the equipment are not sales or purchases, that is, his leases are of tangible personal property leased in substantially the same form as acquired by Mr. F--- as to which he has paid sales tax reimbursement or timely paid use tax measure by the purchase price. (Rev. & Tax. Code §§ 6006, subd. (g)(5) and 6010, subd. (e)(5).) Given this information, you asked whether tax applies to the transfer of the assets into the corporation and whether tax applies to the subsequent leases by the corporation.

Mr. E--- -. S---

-2-

April 15, 1994
395.1585

Revenue and Taxation Code section 6367 provides an exemption from sales tax for the occasional sale of tangible personal property. Section 6006.5 defines "occasional sale" at subdivision (a) to include a sale of property not held or used by a seller in the course of activities for which he or she is required to hold a seller's permit. Assuming that Mr. F--- is truly not required to hold a seller's permit in the course of his lease business, the sale of the equipment to the corporation is an occasional sale as defined in subdivision (a) of 6006.5, and the sale is exempt from sales tax under Section 6367. Sales and Use Tax Regulation 1660, Leases of Tangible Personal Property - In General, provides at subdivision (b)(1)(E) that "sale" and "purchase" do not include a lease of tangible personal property leased in substantially the same form as acquired by a transferor as to which the transferor acquired the property in a transaction that was a retail sale with respect to which the transferor has paid sales tax reimbursement or timely paid use tax measured by the purchase price. The lease will qualify for the exclusion if the property is acquired in a transfer of all or substantially all of the tangible personal property held or used by the transferor in an activity or activities not requiring the holding of a seller's permit and the ownership of the tangible personal property is substantially similar after the transfer. Given that C--- E--- Company will acquire the equipment in a transfer of all of the tangible personal property held or used by M--- F--- in his lease activities and the ownership is substantially the same after the transfer, tax does not apply to the leases of the equipment by C--E---. We hope this answers your questions; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Senior Tax Counsel

RLD:plh
cc:

--- --- District Administrator - --