Did selling 43 percent of a sole proprietorship's property to a new wholly owned corporation and leasing the remaining 57 percent transfer substantially all property?

Plain-English summary

S---, sole proprietor of L---, sold about 43 percent of the business's tangible personal property to commencing Corporation C---, of which S--- was sole stockholder. S--- leased the remaining 57 percent to C--- for at least five years.

The sale consideration included stock, a note, and C---'s assumption of liabilities. The note and assumed liabilities represented 31.21 percent of total consideration for the tangible property. The source gives no amounts or terms.

Tax Counsel concluded that the combined sale and lease did not transfer all or substantially all property under section 6006.5(b). For that rule, transfer of property meant conveyance of beneficial ownership rather than only legal title, control, location, or possession.

On the assumed true lease, S--- retained beneficial ownership and C--- received only possession. The leased 57 percent therefore did not count, leaving only the 43-percent sale and defeating the exemption. The source supplies no determination or later outcome.

Transaction percentages, transfer definition, verified case, scanned source, and missing record

The April 24, 1967 letter answers a January 13 request initially sent to B. H. Trice in the San Francisco office. The redacted representatives argued that the combined sale and lease qualified under section 6006.5(b). The request is absent.

The source identifies S--- as sole proprietor of L--- and sole stockholder of commencing Corporation C---. It gives no names, business activity, ownership record, incorporation documents, seller's permit, tax period, or transaction date.

S--- sold approximately 43 percent of the tangible personal property and leased the rest for a minimum of five years. The source does not say how the percentages were measured, identify any property, state whether every asset belonged to the same activity, or provide quantity, cost, fair market value, title, location, condition, or retained use.

C--- paid with stock, a note, and assumed liabilities. The note plus liabilities equaled 31.21 percent of the total tangible-property consideration. The source gives no total consideration, stock value or rights, note principal or terms, liabilities or creditors, allocation, payment, or formula for the stated percentage.

Former Civil Code section 1039 defined transfer as an act of parties or law conveying title from one living person to another. The letter also cited Commercial Discount Co. v. Cowen, 116 P.2d 599 (1941), for broader ordinary usage that could include changes in location, control, possession, title, or another property interest. Explicit citation verification resolved the reporter citation to the named California Supreme Court case.

Former Civil Code section 13 supplied a contextual and technical-usage construction rule. Applying legal usage but focusing sales-and-use-tax concern on beneficial ownership rather than formal title, counsel read section 6006.5(b)'s transfer of property as a transfer of beneficial ownership.

The letter then assumed a true lease under section 6006(g) or its subsections. In that arrangement the lessor retained beneficial ownership and the lessee received only possession, so the leased property was not transferred for section 6006.5(b). It provides no lease, purchase option, rent, residual value, risk-of-loss term, maintenance duty, title term, possession evidence, or other basis for the true-lease assumption.

The live annotation preserves the sole proprietor, commencing wholly owned corporation, 43-percent sale, 57-percent lease, substantially-all failure, beneficial-ownership definition, true-lease distinction, section 6006.5(b), and April 24, 1967 date. It omits the January 13 request and representative position; L--- and C--- identifiers; five-year minimum; stock, note and liabilities; 31.21-percent consideration ratio; former Civil Code sections; Commercial Discount; section 6006(g); missing records and true-lease evidence; scanned-source text issues; and absent tax or outcome.

The PDF's metadata identifies Adobe's Paper Capture plug-in, and both pages are visibly scans. Visual review confirmed the 43, 57, and 31.21 percentages, statutory citations, case citation, and signature block. The extraction below renders section 6006.5(b) twice as 6006.S(b), it as i t, and one closing parenthesis as }. The original text is preserved, while the summary uses the visible page. The closing block lists E. H. Stetson as Tax Counsel, followed by Glenn L. Rigby and GLR:gg; it does not label the relationship between the two names.

The source supplies no response, correction, property or consideration records, lease or transfer documents, audit, determination, assessment, rate, jurisdiction, tax amount, payment, refund, administrative action, appeal, or later result.

What this means for you

Sole proprietors incorporating businesses

Under this letter, leasing retained assets to a wholly owned corporation did not combine with a sale to satisfy a substantially-all transfer requirement because beneficial ownership stayed with the proprietor.

Accountants and tax professionals

Document each asset's legal and beneficial owner, possession, value, sale consideration, lease economics and options, and the percentage methodology before measuring how much actually transferred.

Common questions

Q: Did the lease count as a transfer of property?
A: No. The letter treated a true lease as passing possession while the lessor retained beneficial ownership.

Q: How much property was sold?
A: Approximately 43 percent of the tangible personal property.

Q: How much was leased?
A: The remaining 57 percent for a minimum five-year term.

Q: Did sole ownership of the corporation cure the shortfall?
A: No. Similar ownership did not change the fact that substantially all property was not transferred.

Q: What consideration did the corporation provide?

A: Stock, a note, and assumed liabilities. The note and liabilities were 31.21 percent of total tangible-property consideration, but no amounts or terms are supplied.

Q: Did counsel test whether the lease was economically a sale?

A: No. The letter assumes a true lease and provides no agreement, purchase option, rent, residual value, risk, or other economic terms.

Q: Was tax finally assessed?

A: The source does not say. It denies the claimed exemption but gives no audit, determination, tax amount, payment, appeal, or later outcome.

Citations and references

• California Revenue and Taxation Code §§ 6006(g) and 6006.5(b)
• Former California Civil Code §§ 13 and 1039
• Commercial Discount Co. v. Cowen (1941) 18 Cal. 2d 610, 116 P.2d 599 — reporter citation verified to the named case
• January 13, 1967 request — identified but not included
• Corporate, ownership, property, valuation, consideration, stock, note, liability, lease, title, possession, transfer, return, tax, audit, assessment, payment, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official April 24, 1967 Tax Counsel letter:

The note and assumption of liabilities represented 31.21 percent of the consideration received for the tangible personal property.

In view of this fact, we are of the opinion that the phrase "transfer of property" appearing in Section 6006.5(b) means the transfer of beneficial ownership in the property rather than being limited to the transfer of legal title.

Since, in a true lease of tangible personal property, the lessor retains the beneficial ownership of the property and the lessee only receives mere possession, we are of the opinion a lease of tangible personal property under Section 6006(g) or its subsections is not a "transfer of property" within the meaning of Section 6006.5(b).

Therefore, since 43 percent of "S"'s tangible personal property was "transferred" to the corporation and the other 57 percent was leased, we are of the opinion that the transaction is not exempt under Section 6006.5(b).

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1660
• Original supporting opinion: 395.1660 PDF

Original ruling text

395 .1660 April 24, 1967

Gentlemen:
Your letter of January 13, 1967, addressed to Mr. B. H. Trice of our San Francisco office, regarding the taxability of the sale and lease of certain tangible personal property, has been referred to this office for reply. It is our understanding that "S", the sole proprietor of "L", sold approximately 43 percent of the tangible personal property to a commencing corporation "C", of which he was the sole stockholder. The remaining tangible personal property was leased to the corporation for a minimum of five years. The consideration "S" received for the property consisted of stock, a note and the assumption of liabilities by the corporation. The note and assumption of liabilities represented 31.21 per­ cent of the consideration received for the tangible personal property. You contend that the transaction, i.e., the sale and lease of the property, is an exempt occasional sale under Section 6006.5 (b) of the Sales and Use Tax Law. "Transfer" as defined in the Civil Code, Section 1039: " ••• is an act of the parties, or of the law, by which title to property is conveyed from one living person to another." In legal phraseology, i t is commonly used to denote the passing of title in property, usually realty, or an interest therein from one person to another. In its ordinary use, it has a very general meaning including the removal of a thing from one place to another, the changing of its control or possession, or the conveyance of title to it. (Commercial Discount Co. v. Cowen, 116 P.2d 599.) The term "transfer" is not specifically defined in the Sales and Use Tax Law. However, as a matter of statutory construc­ tion, words and phrases are to be construed according to con­ text and approved usage of the language; but technical words and phrases and such others as may have acquired a peculiar and appropriate meaning in law are to be construed according to such peculiar and appropriate meaning. (Civil Code Section 13.) Since the phrase "transfer of property" has acquired a special meaning in legal phraseology, i.e., passing of title to prop­ erty, we are of the opinion that this meaning should prevail unless the Sales and Use Tax Law requires otherwise. In the

395.1660
-2-

April 24, 1967

Sales and Use Tax Law, we are not as concerned with the fact of whether or not legal title (ownership} has passed as we are with whether "beneficial ownership" in the property was convey­ ed. In view of this fact , we are of the opinion that the phrase "transfer of property" appearing in Section 6006.S(b) means the transfer of beneficial ownership in the property ra­ ther than being limited to the transfer of legal title. Since, in a true lease of tangible personal property, the les­ sor retains the beneficial ownership of the property and the lessee only receives mere possession, we are of the opinion a lease of tangible personal property under Section 6006(g) or its subsections is not a "transfer of property" within the mean­ ing of Section 6006.S(b). Therefore, since 43 percent of "S"'s tangible personal property was 11 transferred 11 to the corporation and the other 57 percent was leased, we are of the opinion that the transaction is not exempt under Section 6006.S(b). Very truly yours, E . H. Stetson

Tax Counsel

Glenn L. Rigby
GLR:gg

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