Did an 87-percent combined equity after simultaneous restaurant transfers satisfy similar-ownership treatment when one transferee partnership was only 50-percent owned?

Plain-English summary

A sole proprietor simultaneously reorganized two restaurant locations on December 31, 1967. The Lancaster location went to a beginning corporation wholly owned by the proprietor. The Newhall location went to a beginning partnership owned equally by the proprietor and a son-in-law.

The proprietor transferred all assets used in seller's-permit activities, retained approximately 87 percent combined equity, and allocated about 73 percent of the assets to the corporation and 27 percent to the partnership. The district questioned whether no single entity received substantially all the property.

Tax Counsel said section 6006.5(b) did not require one entity to receive substantially all property. Simultaneous transfers to several entities could qualify, but each component had to preserve substantially similar ownership with no more than a 20-percent change.

The wholly owned corporation passed that ownership test; the 50-percent partnership did not. Because section 6006.5 treated the integrated transfers as one transaction, failure of the partnership component defeated occasional-sale treatment for both transfers. The source supplies no later tax outcome.

Two-location values, legacy precedents, per-transferee rule, and missing record

The March 18, 1969 memorandum from Tax Counsel initials JKM answers a February 24 memorandum from the Los Angeles District Principal Auditor, initials JTQ. It gives no taxpayer name, account, restaurant names, seller's permits, tax period beyond the transaction date, or procedural posture.

At December 31, 1967, the sole proprietor's net capital was stated as $24,152 of equity at Lancaster and a $201.59 deficit at Newhall. The source provides no balance sheets, capital accounts, assets, liabilities, revenues, or method for allocating those figures by location.

The Lancaster location went to a beginning corporation. In return for the entire equity, the proprietor received a $27,152 note and the corporation assumed $44,612.28 of liabilities. The source does not reconcile the note's $27,152 face amount with the earlier $24,152 net-capital figure, identify the note terms or creditors, or provide an agreement, stock issuance, valuation, payment, or liability schedule. It states only that the proprietor would be sole stockholder.

The Newhall location went to a beginning partnership. The proprietor received a 50-percent partnership interest valued at $202, and the partnership assumed $13,357 of indebtedness. The source does not reconcile the positive $202 interest value with the stated $201.59 location deficit or provide the partnership agreement, son-in-law's contribution, capital account, profit and loss shares, asset value, debt record, or assumption terms.

The district described the two steps as one transaction transferring all seller's-permit-activity assets. It calculated the proprietor's combined post-transfer equity at approximately 87 percent, even though ownership percentages differed by entity. It also attributed approximately 73 percent of assets to the corporation and 27 percent to the partnership. The source supplies no numerator, denominator, valuation basis, arithmetic, or schedule for either percentage.

Counsel cited three legacy California Tax Service entries. CTS Annotation 1621.10 reportedly exempted a corporation's simultaneous transfer of substantially all assets to three separately incorporated transferees with substantially the same ownership. Annotation 1621.90 reportedly exempted simultaneous corporate transfers to a new corporation and partnership when real or ultimate ownership changed less than 20 percent. Annotation 1621.45 reportedly exempted simultaneous transfers to subsidiaries in each of which the transferor held at least 80 percent. The memorandum does not reproduce those sources, dates, parties, or facts, and the current official collection does not expose those exact identifiers.

From those entries, counsel reasoned that a several-entity transfer failed if ownership changed more than 20 percent in any transferee. A taxpayer could not offset a large change in one entity with continuity in another and rely only on aggregate equity.

Counsel then addressed the integrated-transaction consequence. Section 6006.5 contemplated one transaction transferring all or substantially all property. When several component transfers formed that transaction, each transfer had to be exempt. Here the proprietor kept 100 percent of the corporation but only 50 percent of the partnership, so the partnership's ownership was not similar and both transfers failed.

The live annotation preserves the single-transaction, several-entity rule; per-transferee 20-percent limit; section 6006.5(b); and March 18, 1969 date. It omits the February 24 request, auditor and counsel provenance; restaurants and locations; December 31, 1967 date; every dollar amount; corporate and partnership consideration; proprietor and son-in-law ownership; combined 87-percent equity and 73/27 asset allocation; legacy CTS entries; unexplained value differences; missing records; and absent tax or outcome.

The PDF supplies no response, asset or accounting records, transfer documents, corporation or partnership records, audit, determination, assessment, tax rate or amount, payment, refund, administrative action, appeal, or later result.

What this means for you

Businesses dividing assets among new entities

Under this memorandum, combined equity could conceal a disqualifying ownership change in one recipient. Every component transferee in the simultaneous transaction had to pass separately.

Accountants and tax professionals

Map every asset group, value, liability, consideration package, recipient, and post-transfer owner. Reconcile entity-level percentages to any combined calculation.

Common questions

Q: Did all assets have to go to one entity?
A: No. The memorandum accepted simultaneous transfers to multiple entities in principle.

Q: Was approximately 87-percent combined equity sufficient?
A: No. Each transferee entity had to preserve substantially similar ownership.

Q: Which transfer failed?
A: The restaurant moved to the partnership owned only 50 percent by the original proprietor.

Q: What was the consequence for the corporation transfer?
A: The entire single transaction failed because every component transfer had to qualify.

Q: What consideration accompanied each location?

A: Lancaster involved a $27,152 note and $44,612.28 of assumed liabilities. Newhall involved a 50-percent partnership interest valued at $202 and $13,357 of assumed debt.

Q: How were the 87-percent and 73/27 percentages calculated?

A: The source states them approximately but supplies no valuation basis, numerator, denominator, or schedule.

Q: Did the source reconcile its capital and consideration figures?

A: No. It gives $24,152 Lancaster equity versus a $27,152 note, and a $201.59 Newhall deficit versus a $202 partnership-interest value, without explanation.

Q: Was tax finally assessed on both transfers?

A: The source does not say. It gives staff advice without an audit, determination, tax computation, payment, appeal, or later outcome.

Citations and references

• California Revenue and Taxation Code § 6006.5(b)
• California Tax Service Annotations 1621.10, 1621.90, and 1621.45 — cited for legacy multi-entity examples but not reproduced or currently exposed under those identifiers
• February 24, 1969 Los Angeles District memorandum — identified but not included
• Restaurant, permit, asset, valuation, accounting, note, liability, partnership, corporation, ownership, transfer, return, tax, audit, assessment, payment, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official March 18, 1969 Tax Counsel memorandum:

You point out that if the transaction is to be considered as a whole, taxpayer transferred all of his assets used in activities requiring the holding of seller’s permits, and thereafter, his combined equity in those assets was approximately 87 percent.

In applying Section 6006.5(b), we have compared the real or ultimate ownership of property transferred to that ownership which existed before such transfer to determine whether it was substantially similar, but we have not required that substantially all the property be transferred to one entity.

In the case of transfers to several entities, for the transaction to be exempt each transfer which is a part of that transaction must be exempt.

Since the ownership of the assets transferred to the transferee-partnership is not similar to that which existed before the transfer, this transaction (both transfers) would not qualify as an occasional sale under Section 6006.5(b).

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1680
• Original supporting opinion: 395.1680 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Los Angeles – Dist. Prin. Aud. (JTQ)

From:

Tax Counsel (JKM)

Subject:

Application of Section 6006.5(b)

395.1680

Date:

March 18, 1969

This is in reply to your memo dated February 24, 1969 concerning the application of the abovementioned section. We understand that the taxpayer, as a sole proprietor, was engaged in the restaurant business and had two restaurant locations. As of December 31, 1967, his net capital was an equity of $24,152 at his Lancaster location and a deficit of $201.59 at his Newhall location. At that time he reorganized, and he simultaneously transferred the Lancaster location to a beginning corporation in return for the entire equity, which was represented by a note of $27,152, and the assumption of liabilities of $44,612.28, and the Newhall location to a beginning partnership in return for a 50 percent partnership interest valued at $202 and the assumption of an indebtedness of $13,357. Taxpayer was to be the sole stockholder of the corporation and owned the partnership equally with his son-in-law. You point out that if the transaction is to be considered as a whole, taxpayer transferred all of his assets used in activities requiring the holding of seller’s permits, and thereafter, his combined equity in those assets was approximately 87 percent. However, his percentage of ownership of the entities was not in this ratio since approximately 73 percent of his assets were transferred to the corporation and the remaining 27 percent were transferred to the partnership. You suggest that as substantially all the assets were not transferred to either entity, the transaction does not meet the requirements of Section 6006.5(b). In applying Section 6006.5(b), we have compared the real or ultimate ownership of property transferred to that ownership which existed before such transfer to determine whether it was substantially similar, but we have not required that substantially all the property be transferred to one entity. Thus, a sale by a corporation is an exempt occasional sale under Section 6006.5(b) where substantially all its assets are transferred simultaneously to three separate corporations having substantially the same ownership as the transferor (CTS Anno. 1621.10) A simultaneous

Los Angeles – Dist. Prin. Aud. (JTQ)

-2-

March 18, 1969
395.1680

transfer of all the assets of a corporation to a newly formed corporation and to a newly formed partnership is an exempt occasional sale when after the transfer the real or ultimate ownership of the property is changed less than 20 percent (Anno. 1621.90) A simultaneous transfer of all the assets of a corporation to two or more subsidiary corporations, of which the transferor owns at least 80 percent of the stock in each, is an exempt occasional sale (1621.45). It would seem to follow that if after a transfer the real or ultimate ownership of the property in the transferee entity, or in each entity when there are several, is changed more than 20 percent, the transaction would not be an exempt occasional sale under this section. There remains the situation where a taxpayer transfers substantially all its assets in a single transaction to several entities when after the transfers the ownership of the property in some entities is changed less than 20 percent while in others it is changed more than 20 percent. For the transaction to be exempt as an occasional sale under Section 6006.5(b) we think that after the transfer, the real or ultimate ownership of the property in any of the transferee entities may not be changed more than 20 percent. Section 6006.5 contemplates one transaction transferring all or substantially all of a taxpayer’s property. In the case of a transfer to a single entity, for the transaction to be exempt the resultant ownership of the property must be similar to that which existed before the transfer. In the case of transfers to several entities, for the transaction to be exempt each transfer which is a part of that transaction must be exempt. In this case, taxpayer owned 100 percent of the stock in the newly created corporation but owned only a 50 percent interest in the newly created partnership. Since the ownership of the assets transferred to the transferee-partnership is not similar to that which existed before the transfer, this transaction (both transfers) would not qualify as an occasional sale under Section 6006.5(b).

JKM:smb

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