Was transferring an airplane to a new corporation taxable when the individual owners kept the loan in their names but the corporation made the payments?

Plain-English summary

Two individuals bought an airplane equally in 1987, paid part cash, and borrowed the purchase-price balance in their own names. They immediately chartered the plane on an as-use basis until early 1988, then transferred title to a corporation they formed solely to continue the airplane-leasing business. The lender was not formally contacted and the loan stayed in the individuals' names, but the corporation made the monthly payments.

Senior Tax Counsel John Abbott treated those payments as the corporation's assumption of the owners' loan obligation. That assumption was consideration for aircraft title, making the transfer a taxable purchase. He applied purchaser use tax, payable by the corporation to the Board, measured by the loan obligation assumed.

Neither the substantially-all-business-property aircraft exemption nor the commencing-corporation stock-only rule applied. The individuals had not transferred substantially all property held or used in their business activities, and the corporation provided debt-assumption consideration beyond first-issue stock.

Leasing history, sale and purchase rules, rejected exceptions, and missing record

From 1981 until a 1987 sale, the two clients had held the beneficial interest in an earlier partnership airplane. The partnership leased various business property, including computers, and leased that aircraft to a third party almost continuously. The clients then bought the aircraft at issue individually and equally. The source includes no partnership agreement, ownership record, earlier aircraft identity or sale, computer or other property schedule, lease, proceeds, return, or tax record.

The 1987 individual purchase used cash plus a loan for the balance; no price, cash amount, lender, note, security agreement, loan principal, interest, payment schedule, or balance is supplied. The owners immediately chartered the airplane to third parties on an as-use basis. No aircraft model, tail number, title, registration, location, charter party, flight, customer, rent, operating expense, or tax-paid-purchase or rental election appears.

Early in 1988, the owners formed a corporation solely to continue the aircraft-leasing business and transferred aircraft title to it. The lender did not formally transfer the loan, but the corporation made monthly payments that identified it as the payer. Abbott treated that performance as assumption of the individuals' obligation and rejected the argument that no sale occurred.

Sections 6006(a) and 6010(a) defined a sale and purchase to include transfer of title or possession for consideration. Section 6011(a) measured use tax by the total money-valued amount for which property was sold, leased, or rented. The opinion cited Newco Leasing, Inc. v. State Board of Equalization, 143 Cal. App. 3d 120 (1983), and Cal-Metal Corp. v. State Board of Equalization, 161 Cal. App. 3d 759 (1984), for purchase-price-liability assumption as consideration. It distinguished the limited Macrodyne Industries v. State Board of Equalization, 192 Cal. App. 3d 579 (1987), exception involving already-existing wholly owned transferor subsidiaries.

Abbott applied use rather than sales tax under sections 6283, 6291, and 6401, making the purchasing corporation liable to pay the Board. The loan obligation assumed by the corporation was the consideration and measure. The source supplies no amount, rate, registration filing, use-tax return, due date, payment, penalty, interest, or collection.

Section 6281 failed because the clients did not transfer all or substantially all property held or used in their business activities, which included leasing computers. Regulation 1595(b)(2) and (c) supported that conclusion. Regulation 1595(b)(4) also failed because the transfer was not solely for first-issue stock; the assumed indebtedness was additional consideration. The opinion encloses Regulation 1595, but the enclosure and any stock records are absent.

After the transfer, the corporation continued extensive leasing and sold the airplane in September 1988. The request parenthetically said sales tax was obviously due on that later sale; the opinion supplies no separate analysis, price, buyer, invoice, return, payment, audit, or outcome for it.

The live annotation preserves equal individual ownership, part cash and loan, transfer to a new corporation, loan remaining in the owners' names, corporate payments, debt-assumption conclusion, tax measure, and date. It says the owners used the plane for about a year, while the source more precisely says they immediately chartered it from their 1987 purchase to early 1988. The live entry omits the earlier partnership airplane and computer leasing; charter and extensive post-transfer leasing; corporate purpose; September 1988 sale; use-tax payer and payment destination; sections 6006(a), 6010(a), 6011(a), 6281, 6283, 6291, and 6401; Regulation 1595; all three cases; rejected exemptions; missing records; and absent tax outcome.

What this means for you

Aircraft owners incorporating a leasing activity

Keeping a loan legally in the owners' names does not prevent consideration when the corporation actually takes over the payments.

Accountants and tax professionals

Trace title, possession, economic debt service and every form of consideration, not only lender paperwork. Inventory each transferor's business property for the section 6281 denominator and document seller-permit status, stock issuance, aircraft registration, tax measure, and purchaser payment.

Common questions

Q: Why was there a sale if the loan was never formally transferred?
A: The corporation assumed the obligation in substance by making the monthly payments.

Q: Who owed the tax?
A: The corporation as purchaser owed use tax under the letter's facts.

Q: What measured the tax?
A: The amount of the loan obligation the corporation assumed. The source gives no number.

Q: Why did the commencing-corporation rule fail?
A: The transfer was not solely for first-issue stock; the debt assumption was additional consideration.

Q: Why did section 6281 fail?

A: The clients did not transfer all or substantially all property held or used in their business activities, including their computer-leasing activity.

Q: Did keeping the lender paperwork in the owners' names control?

A: No. Counsel focused on the corporation actually making the monthly payments.

Q: What happened when the corporation sold the aircraft in September 1988?

A: The request says sales tax was obviously due, but the opinion does not analyze or document that later sale or its tax outcome.

Citations and references

• California Revenue and Taxation Code §§ 6006(a), 6010(a), 6011(a), 6281, 6283, 6291, and 6401
• California Sales and Use Tax Regulation 1595(b)(2), (b)(4), and (c)
• Newco Leasing, Inc. v. State Board of Equalization, 143 Cal. App. 3d 120 (1983)
• Cal-Metal Corp. v. State Board of Equalization, 161 Cal. App. 3d 759 (1984)
• Macrodyne Industries v. State Board of Equalization, 192 Cal. App. 3d 579 (1987)
• May 2, 1989 request and enclosed Regulation 1595 — described but not included
• Party, partnership, corporation, aircraft, title, registration, purchase, loan, payment, charter, lease, stock, property, permit, return, tax, later sale, audit, assessment, payment, claim, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official June 23, 1989 John Abbott opinion:

Even though the loan obligation on the airplane was not formally transferred to the corporation, the corporation nevertheless assumed the loan obligation of your clients by making the monthly payments on the loan.

This constitutes consideration for the transfer of the title to the airplane, and is the measure of the tax due.

We cannot agree with your contention that there was no sale of the aircraft.

In this case, your clients did not transfer all or substantially all of the property held or used in the course of their business activities, such as leasing computers, and, therefore, this exemption does not apply to their transfer of the airplane to the new corporation.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1796
• Original supporting opinion: 395.1796 PDF

Original ruling text

395.1796

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6493

June 23, 1989

Mr. P--- -. A--A--- & A--Lawyers
XXXX --- Boulevard, Suite XXX
--- ---, CA XXXXX
Transfer of ownership of airplane – assumption of
loan obligation
Dear Mr. A---:
In your May 2, 1989 letter to Mr. E. L. Sorensen, Senior Tax Counsel, you write: “I have two individual clients who, through their ownership interest in a partnership, owned the (beneficial) interest in an airplane from 1981 until it was sold in 1987. “The partnership was in the business of leasing various items of business property, such as computers. The airplane was leased by the partnership almost the entire time, from 1981 to 1987, to a third party. “The two individual clients, after the partnership airplane was sold in 1987, purchased another airplane in 1987, which they owned in their individual capacities, equally. They paid part cash and the balance of the purchase price was by a loan obtained by my clients in their individual capacities. “They immediately chartered the airplane on an as-use basis to other third parties from the time of purchase in 1987 to early 1988. “In early 1988, my clients transferred the ownership of the airplane to a new corporation whey they formed in early 1988 for the sole purpose of continuing the airplane leasing business. The loan on the airplane was not transferred to the corporation (it remained in

Mr. P--- -. A---

-2-

June 23, 1989
395.1796

the name of the individuals), but the payments were made on the loan by the corporation. “The corporation assumed the loan obligation of the individuals without contacting the lender except by the monthly payments, indicating that the corporation was paying the loan. “After the airplane was transferred to the corporation, it continued to be leased extensively. “In September, 1988, the corporation sold the airplane (obviously a sales tax was then due). “Is there any sales tax due on the transfer of the airplane to the corporation and the corporation’s assumption of the loan? We believe there was either no sale or Rev. & Tax. Code Section 6281 applies, either of which results in no sales tax.” Opinion Under the Sales and Use Tax Law, all sales of aircraft are subject to either the sales tax or the use tax, unless the sale is specifically exempted by statute. If the seller is not required to hold a seller’s permit issued by the Board, the applicable tax is the use tax, not the sales tax. The purchaser, not the seller, is liable for the use tax and must pay the tax to the Board, not the seller. (Revenue and Taxation Code Sections 6283, 6291, 6401). For sales and use tax purposes, both a “sale” under Revenue and Taxation Code Section 6006(a) and a “purchase” under Revenue and Taxation Code Section 6010(a) are defined to mean, among other things: “(a) Any transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration….” If there is a taxable sale or purchase, the measure of the tax is the entire consideration received by the seller. The sales price subject to use tax is defined by Revenue and Taxation Code Section 6011(a) as “the total amount for which tangible personal property is sold or leased or rented, as the case may be, valued in money, whether paid in money or otherwise….” The California courts have held that the consideration paid for the transfer of title to tangible personal property includes an assumption of the liability for the unpaid purchase price of the property. Newco Leasing, Inc. v State Board of Equalization (1983) 143 Cal. App. 3d 120; Cal-Metal Corp. v. State Board of Equalization (1984) 161 Cal. App. 3d 759. One limited exception has been recognized by the court in Macrodyne Industries v. State Board of Equalization (1987) 192 Cal. App. 3d 579, in which the court held that an assumption of liability by already existing wholly-owned corporate subsidiaries of the transferor did not constitute consideration for sales and use tax purposes.

Mr. P--- -. A---

-3-

June 23, 1989
395.1796

Based on the facts you relate, it is our opinion that the use tax applies to the 1988 transfer of title to the airplane from your clients to the new corporation which your clients formed to continue the airplane leasing business. Even though the loan obligation on the airplane was not formally transferred to the corporation, the corporation nevertheless assumed the loan obligation of your clients by making the monthly payments on the loan. This constitutes consideration for the transfer of the title to the airplane, and is the measure of the tax due. We cannot agree with your contention that there was no sale of the aircraft. We also cannot agree with your contention that Section 6281 applies. In summary, that section provides an exemption from sales or use tax on the sale of a vehicle, 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….” In this case, your clients did not transfer all or substantially all of the property held or used in the course of their business activities, such as leasing computers, and, therefore, this exemption does not apply to their transfer of the airplane to the new corporation. (See Sales and Use Tax Regulation 1595(b)(2) and (c)). In addition, the provisions of Regulation 1595(b)(4) do not apply in this case. That subdivision provides that tax does not apply to a transfer of property to a commencing corporation or commencing partnership in exchange solely for first-issue stock of the commencing corporation or an interest in the commencing partnership. That subdivision provides that “tax does apply, however, if the transferor receives consideration such as cash, notes, or an assumption of indebtedness, and the transfer does not otherwise qualify for exemption.” I enclose a copy of Regulation 1595 for your information. Please feel free to contact me if you have any further questions or comments about this letter. Sincerely,

John Abbott
Senior Tax Counsel

JA:jb
Enclosure