Could one corporation simultaneously transfer substantially all divisional business assets to several wholly owned subsidiaries and still qualify as an occasional sale?

Plain-English summary

H--- proposed transferring every division's business and assets except real property to wholly owned subsidiaries. Based on data submitted with an absent May 2 request, audit staff calculated that transferred depreciated book value was well above 80 percent of H---'s total depreciated assets.

Tax Counsel E. H. Stetson concluded that sections 6006.5(b) and 6367 exempted the proposed transaction only if the submitted figures and assumptions were correct and every transfer occurred simultaneously rather than at different times.

Three valuation assumptions, simultaneity condition, live-annotation additions, and missing record

Stetson's May 12, 1966 letter answers a redacted representative's May 2 ruling request. The source gives no business activities, divisions, subsidiaries, tax period, seller's permits, property locations, or reason for the reorganization.

The proposal moved all divisional business and assets except real property to wholly owned subsidiaries. The source does not identify any division, asset, excluded real estate, subsidiary, ownership record, agreement, consideration, liability, or allocation among recipients.

Audit staff based its well in excess of 80-percent calculation on June 30, 1965 figures in Exhibit C, pages 1 and 2. Neither the exhibit, dollar values, numerator, denominator, depreciation method, useful life, classification, or calculation is included.

Staff assumed H--- had no substantial asset increase or decrease after June 30, 1965. It cited Exhibit D, Proposed Capitalization of Subsidiaries June 30, 1966, as showing H--- balance-sheet figures without a substantial change. The exhibit is absent, and the source does not reconcile using a proposed capitalization dated more than a month after the May 12 opinion.

Staff also assumed depreciated book value in the Other Depreciable Assets category applied to the transferred assets. The source gives no category definition, ledger, asset mapping, or verification.

Finally, Stetson assumed every subsidiary transfer would occur simultaneously. Transfers at different times fell outside this opinion. The source gives no planned dates, closing mechanics, integration agreement, or evidence that simultaneity occurred.

The live annotation preserves substantially all assets, simultaneous multiple-subsidiary transfers, wholly owned recipients, exemption, and May 12, 1966 date. It adds that the assets were held or used in a seller's-permit activity and that ownership of at least 80 percent of each subsidiary would also suffice. The supporting letter identifies wholly owned subsidiaries only and does not state the permit-activity or partial-ownership alternative. The live entry omits the May 2 request, excluded real property, depreciated-book-value method, well in excess result, both exhibit dates and all three audit assumptions, absent exhibits and records, and lack of completion or tax outcome.

The PDF supplies no response, revised facts, exhibits, asset or ownership evidence, transfer documents, return, audit conclusion, determination, assessment, tax amount, payment, refund, administrative action, appeal, or later result.

What this means for you

Corporations forming multiple subsidiaries

Under this letter, substantially all assets could move to several wholly owned recipients, but exact simultaneity and the assumed depreciated-value evidence were essential.

Accountants and tax professionals

Document each valuation date and category, depreciation method, transferred and excluded assets, intervening changes, recipient ownership, consideration, and exact closing timing.

Common questions

Q: Did all assets have to go to one subsidiary?
A: No. The letter accepted multiple wholly owned recipients.

Q: What showed substantially all assets would transfer?
A: Depreciated book value well above the historical 80-percent threshold.

Q: Could transfers close at different times?
A: No under the stated opinion; simultaneity was an express assumption.

Q: Was the conclusion unconditional?
A: No. It depended on the accuracy of several submitted asset and valuation assumptions.

Q: What were the exact transferred and total asset values?

A: The source does not say. It reports only well in excess of 80 percent and refers to absent Exhibit C figures.

Q: What did Exhibit D establish?

A: Staff said the proposed June 30, 1966 capitalization showed no substantial asset change, but the exhibit and its future-dated figures are absent.

Q: Did the supporting letter allow subsidiaries owned only 80 percent?

A: It discusses wholly owned subsidiaries only. The live annotation adds an alternative for at least 80-percent ownership in each subsidiary.

Q: Did the proposed transfers occur?

A: The source does not say. It supplies no closing, return, audit, assessment, payment, appeal, or later outcome.

Citations and references

• California Revenue and Taxation Code §§ 6006.5(b) and 6367
• May 2, 1966 ruling request and Exhibit C pages 1–2 with June 30, 1965 figures — identified but not included
• Exhibit D, Proposed Capitalization of Subsidiaries June 30, 1966 — identified but not included
• Division, subsidiary, asset, real-property, depreciation, capitalization, ownership, transfer, timing, consideration, return, tax, audit, assessment, payment, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official May 12, 1966 E. H. Stetson letter:

According to an analysis made by our audit staff of the data submitted with your letter, the percentage of the depreciated book value of the assets transferred to the total depreciated assets of “H” is well in excess of the 80 percent regarded as sufficient to meet the “substantially all” language of Section 6006.5(b) of the Sales and Use Tax Law.

The audit staff has based its conclusions on (1) the figures as of June 30, 1965 shown on Exhibit C pages 1 and 2; (2) the assumption there were no substantial increases or decreases of assets of “H” since that date ...; (3) the assumption that depreciated book value of the Other Depreciable Assets applies to the assets transferred.

Assuming the correctness of assumptions noted, and that the transfer to the subsidiaries is simultaneous, rather than made at different times to the different subsidiaries, it is our opinion that the transfer meets the requirements of Section 6006.5(b) defining an occasional sale, exempted by Section 6367.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1740
• Original supporting opinion: 395.1740 PDF

Original ruling text

395.1740

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

May 12, 1966

Dear Mr. ---:
We have analyzed the proposed transaction upon which you request a ruling in your letter of May 2. From your description, we understand that “H” will transfer all of the business and assets except real property of its various divisions to wholly-owned subsidiaries. According to an analysis made by our audit staff of the data submitted with your letter, the percentage of the depreciated book value of the assets transferred to the total depreciated assets of “H” is well in excess of the 80 percent regarded as sufficient to meet the “substantially all” language of Section 6006.5(b) of the sales and Use Tax Law. The audit staff has based its conclusions on (1) the figures as of June 30, 1965 shown on Exhibit C pages 1 and 2; (2) the assumption there were no substantial increases or decreases of assets of “H” since that date (Exhibit D, Proposed Capitalization of Subsidiaries June 30, 1966, showing “H” Balance Sheet figures, does not show any substantial increase or decrease of assets); (3) the assumption that depreciated book value of the Other Depreciable Assets applies to the assets transferred. Assuming the correctness of assumptions noted, and that the transfer to the subsidiaries is simultaneous, rather than made at different times to the different subsidiaries, it is our opinion that the transfer meets the requirements of Section 6006.5(b) defining an occasional sale, exempted by Section 6367. Very truly yours,

E. H. Stetson
Tax Counsel

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