Did a sale of all LLC assets to a related new subsidiary qualify as an occasional sale when ultimate ownership matched through multiple entity levels?

Plain-English summary

Two individuals and a corporation owned an LLC. Supervising Tax Counsel David H. Levine had to assume each owned one-third because the March 12, 1997 request gave no percentages. He also assumed the other company was a corporation. Under the remaining assumed chain, the two individuals each owned half of a holding company; that holding company owned two-thirds of the other company, while the corporation owned the remaining third. The other company would form wholly owned Newco, which would buy all the LLC's assets.

Levine concluded that the proposed transfer would qualify for the occasional-sale exemption. Sections 6006.5(b) and 6367 look to “real or ultimate ownership,” so he traced through multiple parent and subsidiary tiers. Under his assumptions, each ultimate owner held one-third of the transferred property before and after the proposed sale.

Section 6367 excludes vehicles, vessels, and aircraft, while section 6281 supplies a similar exemption for specified registered or identified mobilehomes, commercial coaches, vehicles, vessels, and aircraft included in a qualifying all-or-substantially-all transfer. The source does not identify any asset in those categories, so it describes section 6281 as a parallel route rather than deciding the treatment of a named vehicle, vessel, or aircraft. Canadian residence or other non-California residence did not change the stated substantially-same-ultimate-ownership test.

Proposed posture, assumptions, tracing method, and missing record

The chartered accountant's client was unidentified. Levine therefore said the letter was not one on which the client could rely under section 6596. The March 12 request is not included, and the source supplies no client identity or authorization, engagement record, entity charter, operating agreement, stock ledger, capitalization table, ownership evidence, residency record, organizational chart, or tax filing.

The transaction was prospective. The LLC would sell all its assets to Newco after the other company formed Newco as a wholly owned subsidiary. No purchase agreement, asset schedule, consideration, price, allocation, closing condition, invoice, title record, transfer date, seller's permit, return, exemption claim, audit, assessment, payment, refund claim, appeal, or evidence of formation or completion appears.

The request omitted both the ownership percentages and whether the other company was a corporation. Levine assumed: Company was a corporation; A, B, and C each owned one-third of LLC; A and B each owned half of Holding; and C owned one-third while Holding owned two-thirds of Company. These are opinion assumptions, not independently supplied records.

Tracing through that chain gave A and B one-third each of Company through their equal shares of Holding's two-thirds interest, while C held one-third directly. Because Company would wholly own Newco, all three would hold the same one-third ultimate interests after Newco's purchase as before it.

The opinion did not simply assume that multi-tier tracing was allowed. It framed the question as whether the statutes require comparison only of seller and purchaser or permit tracing through grandparents and great-grandparents. Citing BTLG Annotation 395.2540 dated June 29, 1954, Levine said the analysis follows parent-child chains, not sibling relationships. Common lineage reaching the same person could preserve ownership even when stopping at the grandparents showed none.

The live annotation names the other entity Company D, a designation absent from the supporting opinion's facts, which call it only Company. It accurately presents the proposed all-assets purchase, the one-third assumptions, multi-level tracing, same-ownership conclusion, section 6006.5(b), and April 17, 1997 date. It omits the unidentified-client reliance denial; assumed corporate form and detailed Holding ownership; sections 6281, 6367, and 6596; Regulation 1595; Annotation 395.2540; parent-child rather than sibling limitation; Canadian-residence question; express fact-and-assumption limitation; missing records; and absence of a completed transaction or later tax outcome.

What this means for you

Related business groups

Map ownership through every parent, holding company, and subsidiary. Different immediate owners do not defeat the exemption when the traced ultimate interests remain substantially the same.

Cross-border owners

Residence was irrelevant to this ownership-continuity test. The opinion focused on percentage interests, not California domicile.

Accountants and tax professionals

Verify the transfer covers all or substantially all relevant business property, document every tier and percentage, distinguish parent-child from sibling relationships, and separately classify any registered or identified mobilehome, commercial coach, vehicle, vessel, or aircraft.

Common questions

Q: Did the seller and buyer need the same direct owners?
A: No. The Board traced through multiple ownership levels to common ultimate owners.

Q: What ownership result did the assumptions produce?
A: Each of the three ultimate owners held one-third before and one-third after the transfer.

Q: Could the exemption include vehicles, vessels, or aircraft?
A: Section 6281 supplied a parallel exemption for specified property in a qualifying transfer. The source does not say the proposed assets included any vehicle, vessel, or aircraft.

Q: Did Canadian ownership prevent the exemption?
A: No.

Q: Did the opinion establish the ownership percentages as facts?

A: No. The request omitted them. Counsel expressly assumed the one-third and intermediate Holding percentages for the opinion.

Q: Would tracing across sibling entities alone satisfy the opinion's method?

A: No. The opinion describes a parent-child lineage analysis and expressly contrasts it with a sibling relationship.

Q: Could the unidentified client rely on the letter under section 6596?

A: No. The opinion says the missing client identity prevented that protection.

Q: Did the proposed purchase close or produce a later tax result?

A: The source does not say.

Citations and references

• California Revenue and Taxation Code §§ 6006.5(b), 6281, 6367, and 6596
• California Sales and Use Tax Regulation 1595
• Sales and Use Tax Annotation 395.2540, dated June 29, 1954
• March 12, 1997 request — described but not included
• Client-identity, entity, ownership, residency, asset, contract, consideration, formation, closing, title, permit, return, exemption, audit, assessment, payment, claim, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official April 17, 1997 David H. Levine opinion:

Initially I note that you have not identified your client. As such, this is not a letter on which your client may rely within the provisions of Revenue and Taxation Code section 6596.

The analysis is performed on a parent-child basis (as opposed, obviously, to a sibling relationship).

Thus, we conclude that the proposed transaction will qualify as an occasional sale and will be exempt from sales and use tax.

Please note that the conclusion reached above applies only to the specific facts and assumptions stated above.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1768
• Original supporting opinion: 395.1768 PDF

Original ruling text

395.1768

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 445-5550
FAX: (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
KATHLEEN CONNELL
Controller, Sacramento
___
JOHN CHIANG
Acting Member
Fourth District, Los Angeles
_____

April 17, 1997

E. L. SORENSEN, JR.
Executive Director

Ms. A--- G--S--- C--Chartered Accountants
XX --- --Suite XXXX
---, ---, --- ---, Canada
Re:

Unidentified Taxpayer

Dear Ms. G---:
This is in response to your letter dated March 12, 1997 regarding the application of sales tax to a transfer between related entities. Initially I note that you have not identified your client. As such, this is not a letter on which your client may rely within the provisions of Revenue and Taxation Code section 6596. You state that two individuals (A and B) and a corporation (C) own a limited liability company (LLC). You state that the same owners also own another company (Company) in the same proportion, except that A and B own their interests through a different corporation (Holding). Company will form a wholly-owned subsidiary (Newco). Newco will then purchase all the assets of LLC. You ask whether the sale from LLC to Newco qualifies as an exempt occasional sale. You do not state the proportion of ownership of these entities, nor have you indicated whether Company is a corporation. For purposes of this opinion, I assume that Company is a corporation. I assume that each of the three owner-members of LLC, A, B, and C, owns a onethird interest in LLC. I also assume that A and B each own one-half of the stock of Holding, and that C owns one-third and Holding owns two-thirds of the stock of Company.

Ms. A--- G---

-2-

April 17, 1997
395.1768

Revenue and Taxation Code section 6367 provides an exemption for occasional sales. Subdivision (b) of Revenue and Taxation Code section 6006.5 defines an “occasional sale” to include: “Any transfer of all or substantially all the property held or used by a person in the course of those activities when after the transfer the real or ultimate ownership of the property is substantially similar to that which existed before the transfer. For the purposes of this section, stockholders, bondholders, partners, or other persons holding an ownership interest in a corporation or other entity are regarded as having the ‘real or ultimate ownership’ of the property of the corporation or other entity.” Although the exemption provided by section 6367 excludes sales of vehicles, vessels, or aircraft, Revenue and Taxation Code section 6281 provides a similar exemption for sales of such property: “There are exempted from the taxes imposed by this part the gross receipts from the sale of, and the storage, use, or other consumption in this state of, a mobilehome or commercial coach required to be annually registered under the Health and Safety Code, or a vehicle required to be registered under the Vehicle Code or subject to identification under Division 16.5 (commencing with Section 38000) of the Vehicle Code, or a vessel or aircraft, when such property is included in any transfer of all or substantially all the property held or used in the course of business activities of the person selling the property and when after such transfer the real or ultimate ownership of such property is substantially similar to that which existed before such transfer. For the purposes of this section, stockholders, bondholders, partners, or other persons holding an interest in a corporation or other entity are regarded as having the ‘real or ultimate ownership’ of the property of that corporation or other entity.” When a seller transfers all its property, as will LLC, then the sale will qualify for the exemption under section 6281 or section 6367, or both, if after the transfer the “real or ultimate” ownership of the transferred property is substantially the same as before the transfer. (See Reg. 1595.) Under the facts stated in your letter and the assumptions set forth above, tracing ownership through the chain of ownership of the participants, A, B, and C each owns one-third of LLC and each also owns one-third of Company; A, B, and C will also each own one-third of Newco using the “tracing” method of analysis. Thus, if the tracing method of analysis is correct, for purposes of the occasional sale exemption A, B, and C each owns a one-third interest in the property to be transferred by LLC and will each own the same interest in that property after the transfer. On the other hand, if there is no tracing through the levels of ownership, A, B, and C will have no ownership interest the property after the transfer, nor will LLC. The question, therefore, is whether the exemptions contemplate determining ownership only of the person

Ms. A--- G---

-3-

April 17, 1997
395.1768

selling the property and the person purchasing the property, or do they contemplate tracing ownership through multiple levels of the ownership (e.g., the “grandparent” of the seller and the “great grandparent” of the purchaser). As you might imagine, this is not a new question. We have concluded that the exemptions do contemplate an analysis of common ownership. (BTLG Annot. 395.2540 (6/29/54).) The analysis is performed on a parent-child basis (as opposed, obviously, to a sibling relationship). For example, if a tracing of the seller’s lineage through to its great grandparent and a tracing of the purchaser’s lineage through its great grandparent leads to the same person, the ownership will be regarded as the same before and after the transfer, even if a tracing through only the grandparents would reveal no common ownership between the seller and the purchaser. Thus, we conclude that the proposed transaction will qualify as an occasional sale and will be exempt from sales and use tax. You also note that some of the persons identified above are Canadian, and you ask whether this is relevant. If a person sells substantially all its property to a person with substantially the same ownership, the transaction will qualify for the exemption without regard to whether the buyer or seller, or both, or any of the “real or ultimate” owners of them are not residents of California. Please note that the conclusion reached above applies only to the specific facts and assumptions stated above. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Supervising Tax Counsel
DHL/cmm
cc:

Out-of-State District Administrator (OH)
Mr. Vic Anderson (MIC:38)
Mr. Robert Nunes (MIC:40)