Could a corporation that had existed in good standing for years still be a commencing corporation if it had never issued stock or conducted business?

Plain-English summary

A client was in the process of transferring unspecified assets to a corporation created years earlier for another purpose that never developed. The shell had been maintained in good standing with the Franchise Tax Board for several years but had never conducted business, received assets, or issued stock.

Senior Tax Counsel John Abbott treated it as a commencing corporation because no stock had previously been issued. Merely recording corporate existence with the Secretary of State and Franchise Tax Board did not by itself end commencing status. The source says good standing only with the Franchise Tax Board; it does not separately state good standing with the Secretary of State.

The asset transfer therefore was not subject to sales or use tax when made solely for the corporation's first issue of stock. The quoted regulation warned that cash, notes, assumed debt, or other consideration could change the result.

Presented shell history, stock-only boundary, live amendment, and missing record

The October 2, 1989 request is quoted in the opinion but not separately included. The lawyer and client are redacted. The requester said the corporation had existed for a number of years, had never been used, had never issued stock, had never received assets, had conducted no business, and had stayed in Franchise Tax Board good standing. It had been formed for a purpose that never materialized.

The requester said the contemplated transfer would produce the corporation's first stock issue and described the client as in the process of transferring certain assets. The source gives no corporation name, formation date, charter, statement of information, Franchise Tax Board record, return, bank account, prior purpose, asset identity or value, transfer agreement, capitalization table, stock authorization, certificate, issuance date, or completion record.

Regulation 1595(b)(4) exempted property transferred to a commencing corporation solely for its first-issue stock. It also said cash, notes, or assumed indebtedness were consideration when no other exemption applied and the measure was the amount attributable to transferred tangible personal property. The source supplies no consideration, liabilities, allocation, tangible-property value, total value, tax calculation, or other-exemption analysis.

Abbott agreed only Based on the facts you have presented. The no-prior-stock fact controlled the definition, while agency recordation alone did not disqualify the corporation. His tax conclusion was conditional on the client's asset transfer being solely for first-issue stock. No subsequent verification, closing, return, audit, assessment, payment, claim, appeal, or outcome appears.

The live annotation preserves the no-stock test, Secretary of State and Franchise Tax Board recordation, Regulation 1595, and November 29 date. It adds (Am. 2000–2), but the supporting opinion contains no 2000 amendment, author, text, source, or explanation. It omits the abandoned purpose; no assets and no business; Franchise Tax Board good standing; solely-for-first-issue-stock conclusion; cash, notes and debt boundary; missing records; and absent completed outcome.

What this means for you

Owners of dormant shell corporations

Age and good-standing filings did not by themselves prevent commencing-corporation treatment under this historical interpretation.

Accountants and tax professionals

Confirm the complete stock, asset, bank, return and business history from official records, not the shell's age alone. Document every transferred asset, first-issue share, liability, and nonstock benefit, and verify the current amendment and completed tax treatment.

Common questions

Q: Did years of corporate existence disqualify the shell?
A: No. The letter focused on the absence of any prior stock issuance.

Q: Did maintaining good standing matter?
A: Franchise Tax Board good standing did not disqualify the corporation. The opinion separately says recordation with the Secretary of State and Franchise Tax Board was insufficient by itself.

Q: What facts supported commencing status?
A: No prior stock, no transferred assets, and no business activity.

Q: What consideration was permitted?
A: Solely the corporation's first-issue stock; other consideration could make the transfer taxable.

Q: Did the opinion verify the shell's records?

A: No. It relied on the presented facts and supplies no formation, stock, asset, business, filing, or good-standing records.

Q: What does Am. 2000–2 add?

A: The live annotation displays that notation, but the supporting opinion supplies no amendment text or explanation.

Q: Did the source establish that the transfer closed tax-free?

A: No. It gives a conditional conclusion and no completed transfer, return, audit, or later outcome.

Citations and references

• California Sales and Use Tax Regulation 1595(b)(4)
• Live-annotation notation (Am. 2000–2) — displayed without supporting amendment text in the official opinion
• October 2, 1989 request — quoted in the opinion but not separately included
• Client, corporation, formation, good-standing, stock, asset, business, consideration, liability, transfer, return, audit, assessment, payment, claim, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official November 29, 1989 John Abbott opinion:

Based on the facts you have presented, we agree with your opinion that the transferee corporation is a commencing corporation within the meaning of Regulation 1595(b)(4) because it has not previously issued any stock.

We agree that the mere recordation of its corporate existence with the Secretary of State and the Franchise Tax Board does not in and of itself disqualify the corporation as a commencing corporation for purposes of this Regulation.

Therefore, no sales or use tax will apply when your client transfers assets to this corporation solely in exchange for the corporation’s first issue of stock.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1885
• Original supporting opinion: 395.1885 PDF

Original ruling text

395.1885

STATE OF CALIFORNIA

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

November 29, 1989

Mr. G--- E. R--Law Offices of R--- and S--XXXX --- Street
---, California XXXXX
Re:

Occasional Sale -- Commencing Corporation

Dear Mr. R---:
In your October 2, 1989 letter to Mr. Les Sorensen, Senior Tax Counsel, you write: “I represent a client who is in the process of transferring certain assets to a corporation solely in exchange for its stock. As I understand the Regulations at
§1595, the transfer of assets (regardless of whether they are substantially all or not) to a ‘commencing’ corporation in exchange solely for stock will not trigger a sales tax liability. That much is clear. What is not so clear is the definition of a ‘commencing’ corporation. I have reviewed the Rulings and do not have a clear answer. “In my situation the transferee corporation has been around for a number of years, but it has never been used for any purpose, and stock has never been issued; nor have any assets been transferred to the corporation. The corporation was set up by my client some years ago with another purpose in mind that never developed. It is a shell corporation which has been maintained in good standing with the Franchise Tax Board for several years, but has never conducted any business. This contemplated transfer would be the first issue of stock in that corporation, and in my opinion, it would satisfy the requirements of a ‘commencing’ corporation. “However, in view of the potential for tax liability, I would appreciate your review and opinion on the matter. Please call if you have any questions, or if additional facts are needed.”

Mr. G--- E. R---

-2-

November 29, 1989
395.1885

OPINION
The Board’s Sales and Use Tax Regulation 1595(b)(4) provides as follows: “CONTRIBUTION TO COMMENCING CORPORATION OR COMMENCING PARTNERSHIP. 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. 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. The tax is measured by the amount of such consideration attributable to the tangible personal property transferred.” Based on the facts you have presented, we agree with your opinion that the transferee corporation is a commencing corporation within the meaning of Regulation 1595(b)(4) because it has not previously issued any stock. We agree that the mere recordation of its corporate existence with the Secretary of State and the Franchise Tax Board does not in and of itself disqualify the corporation as a commencing corporation for purposes of this Regulation. Therefore, no sales or use tax will apply when your client transfers assets to this corporation solely in exchange for the corporation’s first issue of stock. Please feel free to contact me if you have further questions. Sincerely,

John Abbott
Senior Tax Counsel

JA:jb
bc:

--- --- District Administrator