Does 'substantially similar' ownership require similar percentage interests before and after an asset transfer?

Plain-English summary

Before an anticipated sales-tax audit, advisers argued that section 6006.5 exempted a taxpayer's asset transfer to a redacted company. Associate Tax Counsel James J. Delaney first found that section 6006.5(a) did not apply: section 6014 made the taxpayer a seller, section 6066 required a permit, and the property was used in that activity. He also said the current equipment sale might be one of a series sufficient in number, scope, and character to create a permit-requiring activity.

The parties' main disagreement concerned section 6006.5(b)'s requirement that real or ultimate ownership remain substantially similar. Delaney said the Board consistently interpreted that phrase to require similar ownership percentages, not merely substantially the same number or identities of owners.

His hypothetical compared A---'s 99-percent and B---'s 1-percent interests in Corporation X with another A---/B--- corporation in which B--- held 99 percent. The same people would remain, but A---'s property interest would fall sharply.

In the actual transaction, individuals other than shareholders in the transferee company apparently held two thirds of about 4 million taxpayer shares before the transfer. After property was exchanged for transferee shares, the same people held about 2.5 million of about 60 million shares. Delaney called that change substantial. The source gives no formal audit determination or later outcome.

Three exemption barriers, share-count evidence, procedural posture, and missing record

Delaney's April 24, 1959 letter answers redacted representatives' April 14 letter explaining why they believed the occasional-sale exemption applied. It also references their March 30 statement that an audit was expected soon. Neither letter nor the enclosed Sales and Use Tax Law pamphlet is in the official PDF.

The source redacts the taxpayer and transferee and provides no business description, asset list, transfer date, agreement, consideration, equipment description or value, ownership ledger, capitalization table, or tax reporting.

First, Delaney read section 6006.5(a) as unavailable because the assets had been held or used by a seller in an activity requiring a seller's permit. Sections 6014 and 6066 supported seller and permit status; counsel emphasized that seller was not limited to persons in the business of making retail sales. The source gives no actual sales, permit, permit activity, property use, or legal analysis beyond these conclusions.

Second, counsel said the current equipment sale might belong to a series sufficient in number, scope, and character to constitute its own permit-requiring activity. He did not identify another sale, date, item, buyer, price, count, scope, or character and used qualified appears possible language.

Third, staff applied a percentage-based interpretation of section 6006.5(b). Delaney acknowledged the words could reasonably be read to require only substantially the same number or identity of owners, but thought that would extend exemption beyond legislative intent. His 99-percent/1-percent hypothetical showed why identical names could conceal a reversed economic interest.

For the real transaction, Delaney described an affected group as other than shareholders in your company. It apparently held two thirds of approximately 4 million taxpayer shares before transfer and approximately 2.5 million of approximately 60 million transferee shares afterward. The source uses approximations and gives no holder names, exact counts, classes, values, voting or economic rights, options, ownership of the remaining taxpayer shares, or full before-and-after table.

The live annotation characterizes the transferor as a small corporation, the transferee as a large corporation, the affected persons as majority shareholders, and the large corporation as holder of the small corporation's remaining stock. The supporting letter gives relative share totals and says the affected group was other than the transferee's shareholders, but does not expressly identify the transferee as owner of the remaining transferor stock. The live entry preserves the percentage-continuity rule, material reduction, non-similar conclusion, section 6006.5(b), and April 24, 1959 date. It omits the April 14 and March 30 letters; sections 6006.5(a), 6014 and 6066; seller and permit conclusion; possible series of equipment sales; interpretive concession and 99/1 hypothetical; exact approximate share counts; preliminary audit posture; hearing options; scanned source; missing records; and absent tax or outcome.

Delaney did not issue a determination. He suggested petitioning the item after the anticipated audit produced the Board's formal determination of tax due and offered an informal hearing before a legal hearing officer, a formal Board hearing, or both. The source supplies no audit, determination, petition, hearing, Board action, payment, appeal, or later result.

The official PDF metadata identifies Adobe's Paper Capture plug-in and both pages are visibly scans. Visual review confirms the key share counts, percentages, citations, and procedural text. The OCR extraction below drops a space in Bown and reads a printed digit 1 as lowercase l; the source has no case citations to submit for bulk citation verification. The preserved text remains unchanged.

What this means for you

Businesses transferring assets among commonly owned entities

Under this staff view, common names on both ownership lists did not establish continuity when their relative percentages changed substantially. Separate permit-activity and sale-series questions could independently defeat exemption.

Accountants and tax professionals

Prepare a complete before-and-after capitalization table with share classes, values, voting and economic rights, and separately document asset use, seller status, permit requirements, and every related equipment sale.

Common questions

Q: Was having the same owners enough? A: No. Counsel required their ownership percentages to remain substantially similar.

Q: What happened to the affected owners' stake? A: Their two-thirds interest in about 4 million shares became about 2.5 million out of 60 million shares.

Q: Did the letter identify another reason exemption might fail? A: Yes. The property was used in a permit-requiring activity, and the sale might also belong to a sufficient series.

Q: What procedural step did counsel suggest? A: Petition after receiving the Board's formal audit determination.

Q: Was the ownership issue the only reason staff found no exemption?

A: No. Counsel first found the assets were used in a seller's permit activity under section 6006.5(a) and separately raised a possible series of equipment sales.

Q: What was the exact post-transfer percentage?

A: The source does not calculate one and uses approximate counts—about 2.5 million of about 60 million transferee shares—with no class or value information.

Q: Had the Board issued an audit determination?

A: No. The letter says an audit was anticipated and advises petitioning after a formal determination. No audit, determination, petition, hearing, or outcome is supplied.

Q: Does the source identify the transferred assets or consideration?

A: No. It refers generally to an asset transfer and equipment sale without an agreement, item list, values, price, or payment terms.

Citations and references

• California Revenue and Taxation Code §§ 6006.5(a), 6006.5(b), 6014, and 6066
• March 30 and April 14, 1959 representative letters and enclosed Sales and Use Tax Law pamphlet — identified but not included
• Asset, equipment, sale-series, permit, ownership, capitalization, transfer, consideration, return, audit, determination, petition, hearing, Board, payment, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official April 24, 1959 James J. Delaney letter:

It seems obvious that taxpayer's transfer does not qualify as exempt for the reasons mentioned above. In addition, it appears possible that the current sale may be one of a series of sales of equipment "sufficient in number, scope, and character to constitute an activity" requiring that company to hold a seller's permit.

We have consistently interpreted said words as requiring the owners of the property before and after the transfer to have a percentage of ownership similar to their original interest.

Before the transfer these parties apparently owned two-thirds of approximately 4,000,000 taxpayer shares. Following the transfer the same individuals owned approximately only 2,500,000 of some approximately 60,000,000 of your shares.

We, therefore, respectfully suggest that this item be petitioned following receipt of the Board's formal determination of tax found to be due.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1640
• Original supporting opinion: 395.1640 PDF

Original ruling text

395.1640

April 24, 1959

Gentlemen:
Thank you for your letter of April 14 which contains your reasons for believing the occasional sale exemption provided in Section 6006.5 of the Sales and Use Tax Law (pamphlet copy enclosed} applicable to the above taxpayer's transfer of assets to As you are aware, Section 6006.5(a) defines an occasional sale to include a sale of property "not held or used by a seller in the course of an activity for which he is required to hold a seller's permit, provided such sale is not •••• " Reference to Section 6014 of the law clearly indicates that the taxpayer is a seller as therein defined and was necessarily required to hold a seller's permit as per Section 6066. You will notice that the definition of seller is not limited to persons engaged in the business of making retail sales. It seems obvious that taxpayer's transfer does not qualify as exempt for the reasons mentioned above. In addition, it appears possible that the current sale may be one of a series of sales of equipment "sufficient in number, scope, and character to con­ stitute an activity" requiring that company to hold a seller's permit. From your letter it is apparent that our difference of opinion is based primarily on the correct interpretations of the words "sub­ stantially similar" appearing in Section 6006.5(b). We have con­ sistently interpreted said words as requiring the owners of the property before and after the transfer to have a percentage of ownership similar to their original interest. It is true. that the words are reasonably capable of being interpreted as requiring only that the number of owners or the similarity of particular owners be substantially similar. However, it is our opinion that an interpretation of these words other than the one we have employed would extend the exemption beyond the legislative intent. The following is an example of what would result from applying your interpretation: Suppose that A owns 99 percent of Corpora­ tion X and B owns l percent. Also suppose that A and Bown Corporation Y, but that B owns 99 percent thereof. If property were transferred by Corporation X to Corporation Y it seems

395.1640
-2-

April 24, 1959

obvious that A's ownership interest in the property will have been substantially reduced even though he is still one of the owners of Corporation Y. Under your theory the transfer would be exempt either because the same number of owners were involved or because the identical owners were involved although holding different percentages of ownership interest. Relating the above discussion to your problem, we reasoned that the two-thirds ownership interest in taxpayer held by other than shareholders in your company, was substantially reduced when said shareholders exchanged the property for shares in your com­ pany. Before the transfer these parties apparently owned two­ thirds of approximately 4,000,000 taxpayer shares. Following the transfer the same individuals owned approximately only 2,500,000 of some approximately 60,000,000 of your shares. As previously stated, we believe such a change is "substantial". You stated in your letter of March 30, 1959 that a sales tax audit of the taxpayer was anticipated in the near future. We, therefore, respectfully suggest that this item be petitioned following receipt of the Board's formal determination of tax found to be due. In the course of handling your petition, we will be happy to provide you with an informal oral hearing be­ fore the legal hearing officer, a formal Board hearing, or both depending on your preference. Very truly yours,

James J. Delaney
Associate Tax Counsel
JJD:lm
Enclosure
cc: Fresno - Compliance