Was a direct transfer of cash, equipment, and leased vehicles to a newly formed corporation for all its stock taxable?

Plain-English summary

Corporation X asked about transferring cash, machinery, equipment, and 50 Chevrolet automobiles and trucks then under lease to various lessees directly to Corporation Y. In exchange, Y would issue all stock authorized for issuance directly to X.

Board counsel assumed Y had no assets before the transfer and was formed for this transaction. Counsel also assumed the stock was the only consideration: Y would not assume debt and X would receive nothing else.

On those assumptions, Tax Counsel E. H. Stetson treated Y as a commencing corporation and concluded the transfer solely for all its authorized stock was not subject to sales tax under Ruling 81.

Direct-transfer assumptions, 2001 note, live scope, and missing record

The January 7, 1953 letter identifies the parties only as X and Y and redacts the addressee. It supplies no request, corporate name or charter, owner, officer, board resolution, capitalization table, stock authorization, certificate, asset list, value, basis, invoice, purchase agreement, bill of sale, or tax filing.

Stetson assumed the property moved directly from X to Y and Y issued or transferred its stock directly to X. He further assumed Y had no assets before the transfer and was formed for this transaction. These are stated opinion assumptions; the source supplies no formation date, pre-transfer balance sheet, bank record, intermediate transferee, assignment, closing record, or proof of transfer.

The property included cash, machinery, equipment, and 50 Chevrolet automobiles and trucks currently leased to various lessees. The source gives no cash amount, equipment identity, vehicle year, model, identification or registration number, title, location, condition, value, lessee, lease term, rental, tax-paid-purchase or rental election, payoff, lien, or lease-assignment record.

Y would issue all its authorized stock directly to X. No share count, class, par or fair-market value, subscription, issuance date, certificate, shareholder register, or later ownership appears.

The printed asterisk after solely leads to a May 28, 2001 note signed SPJ. It states that solely meant the analysis assumed no assumption of indebtedness in X's transfers to Y and no consideration other than stock. The record does not identify SPJ, explain why the note was added almost five decades later, or include the debt, consideration, or review materials behind it.

The live annotation condenses the result to assets transferred directly to a commencing corporation formed for the transaction solely for all its stock. It accurately preserves the result and date but omits the cash, machinery, equipment, 50 leased Chevrolet automobiles and trucks; direct stock-transfer assumption; Y's no-prior-assets assumption; Ruling 81; 2001 note; no-debt and no-other-consideration assumptions; missing records; and absence of an audit, assessment, payment, appeal, or later tax outcome.

What this means for you

Businesses forming a new corporation

The historical result depended on a direct property-for-stock formation in which the new corporation began without assets and issued all its stock to the transferor.

Accountants and tax professionals

Document both sides of the direct exchange, Y's pre-transfer balance sheet and formation purpose, every authorized and issued share, each asset and lease, and every form of consideration. Debt assumption or any nonstock benefit falls outside the source's express assumptions.

Common questions

Q: What property was transferred?
A: Cash, machinery, equipment, and 50 leased Chevrolet automobiles and trucks.

Q: What did X receive?
A: All authorized stock of the new corporation.

Q: Did Y have assets before the transaction?
A: No, under the letter's assumptions.

Q: Could Y assume X's debt under this result?
A: No. The later staff notation says no debt assumption or other consideration was included.

Q: Did the opinion establish that Y actually had no prior assets?

A: No. Counsel expressly assumed that fact.

Q: What did the source say about the 50 vehicles?

A: They were Chevrolet automobiles and trucks under lease to various lessees. It gives no titles, registrations, values, lease terms, or tax records.

Q: Is Ruling 81 reproduced or linked in the source?

A: No. The letter cites it but does not include its text.

Q: Does the source supply a completed tax filing or later outcome?

A: No.

Citations and references

• California Sales and Use Tax Ruling 81, as applied in the letter
• May 28, 2001 SPJ clarification printed in the official source
• Request, party, corporate, formation, balance-sheet, asset, cash, equipment, vehicle, title, registration, lease, debt, consideration, stock, transfer, return, audit, assessment, payment, claim, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official January 7, 1953 E. H. Stetson opinion:

We assume that the above-mentioned property was transferred by “X” directly to “Y”, and the stock of “Y” was transferred or issued by that company directly to “X”. We assume further that prior to the transfer, “Y” had no assets and was formed for this transaction.

Under these circumstances, the transfer would be to a commencing corporation solely for all of its authorized stock and in our opinion, would not be subject to sales tax under Ruling 81.

From the May 28, 2001 SPJ note printed in the same official source:

by “solely” it is assumed that there was no assumption of indebtedness in the transfers by X to Y, or any other consideration other than the stock.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1800
• Original supporting opinion: 395.1800 PDF

Original ruling text

STATE OF CALIFORNIA

395.1800

STATE BOARD OF EQUALIZATION

January 7, 1953

--- --- ----- --- ----- --- --Gentlemen:
You ask whether the transfer of cash, machinery, equipment, and 50 Chevrolet automobiles and trucks currently under lease to various lessees by “X” to “Y”, solely* in exchange for all of the stock of the latter corporation authorized to be issued is a taxable sale under the California Sales and Use Tax Law. We assume that the above-mentioned property was transferred by “X” directly to “Y”, and the stock of “Y” was transferred or issued by that company directly to “X”. We assume further that prior to the transfer, “Y” had no assets and was formed for this transaction. Under these circumstances, the transfer would be to a commencing corporation solely for all of its authorized stock and in our opinion, would not be subject to sales tax under Ruling 81. Very truly yours,

E. H. Stetson
Tax Counsel

EHS:tj
cc:

Stockton – Compliance.

• by “solely” it is assumed that there was no assumption
  of indebtedness in the transfers by X to Y, or any other
  consideration other than the stock.
  SPJ 5/28/01