Would tax apply when a company moved its one-half airplane interest to a new corporation solely for that corporation's first-issued stock?

Plain-English summary

A company owned half of what the source calls a 1979 King Air 2000 airplane; another California corporation owned the other half. Both used it for private business, while the co-owner operated a for-profit charter business. To shield the requester from liability from charter and ordinary business flights, it anticipated forming a corporation whose only asset would be the requester's half-interest.

The letter concluded that transferring the interest solely for the new corporation's first-issued stock would not be a taxable sale.

The word “solely” was critical. Anything else received would be additional consideration valued in money. Counsel said assumed liabilities were the most common example and hypothesized debt secured by the airplane interest; the source does not say the requester actually had any such debt.

Proposed aircraft facts, regulatory mislabel, debt hypothetical, and missing record

The October 20, 1992 request is quoted but not separately included. The company and lawyer are redacted. The source gives no aircraft manufacturer record, model confirmation, serial or tail number, title, registration, acquisition date or price, basis, value, location, insurance, maintenance, airworthiness, ownership agreement, or transfer restriction.

The two corporations used the aircraft for private business, and the co-owner chartered it for profit. No flight log, passenger, route, hours, charter certificate or agreement, customer, revenue, expense, lease, operator record, accident, claim, insurance policy, liability analysis, or tax-paid-purchase or rental election is included.

The requester anticipated a new corporation solely to hold its one-half interest for liability separation. The source supplies no articles, shareholder, formation date, capitalization, balance sheet, governance, insurance, stock authorization, share count, certificate, valuation, contribution agreement, title transfer, or closing.

The request calls Regulation 1595(b)(4) RTC Section 1595 (b)(4). Counsel identifies it correctly as a regulation. The quoted request also says first issue stock of the corporations, while the transaction concerns one proposed corporation. The opinion does not discuss those wording defects.

Senior Tax Counsel David H. Levine agreed that a transfer solely for that corporation's first-issue stock would not be a sale subject to sales or use tax. He did not say a broader occasional-sale or aircraft exemption applied.

Anything received beyond stock generated tax at its money value. Levine used a hypothetical: if R--- had debt secured by its aircraft interest and the transferee assumed it, the debt amount would be taxed. No lender, note, principal, balance, security agreement, assumption, payment, release, joint liability, tax rate, measure calculation, or actual additional consideration appears.

The live annotation preserves the one-half aircraft interest, commencing corporation, first-issue-stock-only condition, no-sale conclusion, and date. It omits the aircraft description and use; co-owner and charter operation; liability-shield purpose; proposed sole asset; requester wording defects; anything-else consideration warning; assumed-debt hypothetical; missing records; and absence of completed formation, transfer or tax outcome.

What this means for you

Aircraft owners using a liability entity

First-issued stock can support a nontaxable transfer to a commencing corporation only when nothing else is received.

Accountants and tax professionals

Review the complete aircraft title, registration, ownership, charter, financing, insurance, formation, stock, valuation and transfer record. Identify every benefit received beyond first-issue stock, and do not turn counsel's debt hypothetical into a transaction fact.

Common questions

Q: How much of the airplane was transferred?
A: A one-half interest.

Q: Why was the new corporation being formed?
A: To shield the existing company from liability arising from charter and business flights.

Q: What consideration was permitted without tax?
A: Solely the commencing corporation's first-issued stock.

Q: What common fact would create tax?
A: Counsel said assumed liabilities were common additional consideration and hypothesized secured aircraft debt. The source does not say this aircraft interest had debt.

Q: Did the source confirm the aircraft model as a King Air 200?

A: No. It prints 1979 King Air 2000 airplane; this page preserves that description without correcting it.

Q: Did counsel apply a separate aircraft exemption?

A: No. The opinion rests only on the solely-for-first-issue-stock rule in Regulation 1595(b)(4).

Q: Was the holding corporation formed or the aircraft transferred?

A: The source does not say.

Citations and references

• California Sales and Use Tax Regulation 1595(b)(4)
• October 20, 1992 request — quoted but not separately included
• Party, corporation, aircraft, title, registration, ownership, flight, charter, liability, insurance, formation, stock, value, debt, consideration, transfer, return, audit, assessment, payment, claim, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official December 11, 1992 David H. Levine opinion:

If R--- transfers its one-half interest in the airplane to the commencing corporation solely in exchange for that corporation's first issue of stock, then we agree that the transfer would not be a sale which is subject to sales or use tax.

Please pay particular attention to the emphasis on "solely."

For example, if R--- has a debt secured by its interest in the airplane and the transferee assumes that debt, tax applies the amount of the debt.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.2030
• Original supporting opinion: 395.2030 PDF

Original ruling text

395.2030

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

December 11, 1992

GRAY DAVIS
Controller, Sacramento
────────
BURTON W. OLIVER
Executive Director

Mr. D--- O--R--- F--- P---, Inc.
P. O. Box XX
---, CA XXXXX-XXXX
Re:

SR -- XX-XXXXXX

Dear Mr. O---:
This is response to your letter dated October 20, 1992 in which you inquire as to the application of tax to a transfer of ownership of an airplane. You state: "We currently own a 1/2 interest in a 1979 King Air 2000 airplane. Another California corporation owns the other 1/2 interest. The plane is used for private business by both corporations and is used in a charter business for profit, which is operated by our partner corporation. "Our desire is to shield R--- F--- P---, Inc., from any liability that might result from flying the plane as a charter or while being flown by either of the two corporations in their normal scope of business. Therefore, we anticipate forming a separate corporation that would have as its only asset a 1/2 interest in the plane. "It is our understanding that under RTC Section 1595 (b)(4), a transfer of property (1/2 interest in the airplane) from R--- F--- P---, Inc., to a commencing corporation solely in exchange for the first issue stock of the corporations would be exempt from California sales tax." If R--- transfers its one-half interest in the airplane to the commencing corporation solely in exchange for that corporation's first issue of stock, then we agree that the transfer would not be a sale which is subject to sales or use tax. (Reg. 1595(b)(4).) Please pay particular attention to the emphasis on "solely." If R--- receives anything else in consideration for the transfer in addition to the first issue stock, tax applies to that consideration, valued in money. The most

Mr. D--- O---

-2-

December 11, 1992
395.2030

common type of such consideration is an assumption by the transferee of liabilities. For example, if R--- has a debt secured by its interest in the airplane and the transferee assumes that debt, tax applies the amount of the debt. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Senior Tax Counsel

DHL:cl