Did use tax apply when a foreign corporation transferred its debt-free vessel outside California solely for first-issue stock of a new corporation with the same sole owner?

Plain-English summary

An individual solely owned a G--- corporation whose only asset was a debt-free vessel under British registry and kept in Europe and the Caribbean since purchase several years earlier. The supporting letter redacts the jurisdiction; CDTFA's live annotation identifies it as Guernsey. The owner proposed a wholly owned Delaware corporation, assignment of vessel title outside California, California registry, and bringing the vessel to California.

Tax Counsel Sophia H. Chung assumed the transfer would occur solely in exchange for first-issue stock of the new corporation, with no assumed liabilities or other consideration. On those facts, the assignment was not a “purchase” under section 6010 and did not trigger use tax. The quoted request separately called the assignment for no consideration; the opinion does not reconcile that phrase with receiving stock.

The letter contrasted this with an ordinary vessel purchase from a non-permit seller, where section 6283 and Regulation 1610 generally shift the applicable tax to purchaser use tax measured by sales price.

Redacted jurisdiction, inconsistent consideration wording, cross-reference, and missing record

The March 27, 1996 request is quoted but not separately included. The lawyer and owner are redacted. The complete opinion consistently calls the foreign entity G--- and never spells out its jurisdiction. The official live annotation supplies Guernsey corporation; this page attributes that identity to the live entry rather than to the redacted supporting letter.

The G--- corporation's only asset was the vessel, it had no associated debt, and the individual was sole shareholder. The vessel had remained outside the United States in Europe and the Caribbean since a purchase several years earlier. The source gives no vessel name, type, manufacturer, model, year, identification or official number, title, British registry document, purchase date or price, seller, tax, location dates, voyage, use, insurance, lien search, balance sheet, or corporate ownership record.

The owner said the G--- structure was no longer advisable because he wanted to bring the vessel to California. He proposed a Delaware corporation of which he would be sole shareholder and whose only asset would be the vessel. No reason for the existing structure, corporate advice, articles, stock authorization, capitalization, share count, balance sheet, California qualification, insurance, operational plan, or California-use record appears.

The request says the G--- corporation would assign title for no consideration. Chung then expressly assumes the assignment would be solely in exchange for first-issue stock and no other consideration, such as assumed liabilities. The live annotation combines both phrases, saying stock was exchanged with no consideration. The source does not explain whether no consideration means no nonstock consideration or reflects an inconsistent transaction description.

The assignment situs outside California, first-issue status, stock-only exchange, no other consideration, and no liabilities are all express assumptions. The source supplies no assignment, title transfer, closing location, stock certificate, valuation, debt evidence, liability search, registry application, California arrival, use, mooring, return, audit, assessment, payment, claim, appeal, or later outcome.

Chung cited BTLG Annotation 395.1970 dated July 27, 1992. CDTFA's live 395.1970 entry concerns materially different aircraft facts: a taxpayer's initial aircraft purchase for a planned charter business was taxable use, while a later stock-only transfer to a commencing corporation was not a sale. This source uses only its later-transfer principle and does not import those aircraft facts into the vessel transaction.

The live 395.2046 entry preserves Guernsey, British registry, no debt, foreign location, Delaware formation, same sole owner, sole-asset plan, California registry and arrival, stock-only conclusion, and date. It omits the outside-California situs assumption; general sales/use and nonpermit-seller vessel discussion; statutes and Regulation 1610; 395.1970 provenance and distinct facts; consideration-language inconsistency; missing records; and absent completion or tax outcome.

What this means for you

Vessel owners and corporate planners

Confirm the place of transfer, type of stock, absence of debt, and absence of any other consideration. Each was an express assumption.

Accountants and tax professionals

Document the vessel, ownership, debt search, transfer situs, stock, title assignment, registry change, California arrival and use, and every form of consideration. Do not treat the source's for no consideration and solely in exchange for stock phrases as self-reconciling.

Common questions

Q: Where was the transfer assumed to occur?
A: Outside California.

Q: What consideration was permitted under the opinion?
A: Solely first-issue stock of the commencing Delaware corporation.

Q: Could the new corporation assume vessel debt?
A: Not under the stated facts; the vessel had no debt and no liabilities were to be assumed.

Q: Did changing registry to California change the conclusion?
A: No, given the opinion's other assumptions.

Q: Does the supporting opinion identify the original corporation as Guernsey?

A: No. It says G---. The official live annotation supplies Guernsey.

Q: Was the assignment for no consideration or for stock?

A: The request says no consideration, while counsel assumes solely first-issue stock with no other consideration. The source does not reconcile those descriptions.

Q: Did the opinion establish the assignment location?

A: No. It expressly assumes the assignment would occur outside California.

Q: Did the vessel come to California and produce a tax outcome?

A: The source does not say.

Citations and references

• California Revenue and Taxation Code §§ 6010, 6051, 6201, 6283, and 6401
• California Sales and Use Tax Regulation 1610(a)(2) and (b)(1)(C)
• Live Sales and Use Tax Annotation 395.1970, concerning distinct aircraft-purchase and transfer facts
• March 27, 1996 request — quoted but not separately included
• Party, corporation, vessel, title, registry, acquisition, location, voyage, use, debt, stock, valuation, assignment, California arrival, return, audit, assessment, payment, claim, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official June 17, 1996 Sophia H. Chung opinion:

The G--- corporation will then assign title to the vessel for no consideration to the Delaware corporation.

We assume that the assignment of the vessel from the G--- corporation to the Delaware corporation will occur outside of California.

We further assume that any stock issued by the Delaware corporation is first issue stock and that the assignment of the vessel from the G--- corporation to the Delaware corporation will be solely in exchange for the first issue stock of the commencing Delaware corporation, with no other consideration (such as any assumption of liabilities).

Under these facts, such a transfer is not a purchase subject to use tax.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.2046
• Original supporting opinion: 395.2046 PDF

Original ruling text

395.2046

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) 324-2614
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

June 17, 1996

KATHLEEN CONNELL
Controller, Sacramento
────────
E. L. Sorensen, Jr.
Executive Director

Mr. B--- P. D--F--- B--- & M----- Building, XXth Floor
XXX --- Street
--- ---, CA XXXXX
Re:

T--- F. W---

Dear Mr. D---:
This is in response to your letter dated March 27, 1996, asking whether an assignment of a vessel from a G--- corporation to a Delaware corporation is subject to tax. You provide the following factual background: “Mr. W---e is currently the sole shareholder of a G--- corporation. This corporation’s sole asset is a vessel, currently under British registry. There is no debt associated with this vessel. “The vessel has since its purchase several years ago been located outside the United States in Europe and the Caribbean. Mr. W--- would now like to bring this vessel to California, and the use of a G--- corporation is no longer advisable. Thus, Mr. W--- will form a new Delaware corporation of which he will be the sole shareholder. “The G--- corporation will then assign title to the vessel for no consideration to the Delaware corporation. The Delaware corporation’s only asset will be the vessel. As part of this proposed transfer, the vessel’s registry will be changed to California.” DISCUSSION Retail sales of tangible personal property in California are subject to sales tax, measured by gross receipts, unless specifically exempt by statute. (Rev. & Tax. Code § 6051.) When sales tax does not apply, use tax, measured by the sales price, applies to the use of tangible personal property purchased from a retailer for the storage, use, or other consumption in California, unless the use is exempt from taxation by statute. (Rev. & Tax. Code §§ 6201, 6401.) The term

Mr. B--- P. D---

-2-

June 17, 1996
395.2046

“purchase” means any transfer of title or possession of tangible personal property for a consideration. (Rev. & Tax. Code § 6010.) Revenue and Taxation Code section 6283 provides that the sale of a vessel, as defined by Sales and Use Tax Regulation 1610(a)(2), is exempt from sales tax if the vessel is sold by a person who is not required to hold a seller’s permit. Instead, the applicable tax is the use tax owed by the purchaser measured by the sales price of the vessel purchased for use in California. (Reg. 1610(b)(1)(C).) We assume that the assignment of the vessel from the G--- corporation to the Delaware corporation will occur outside of California. We further assume that any stock issued by the Delaware corporation is first issue stock and that the assignment of the vessel from the G--corporation to the Delaware corporation will be solely in exchange for the first issue stock of the commencing Delaware corporation, with no other consideration (such as any assumption of liabilities). Under these facts, such a transfer is not a purchase subject to use tax. (See BTLG Annot. 395.1970 (7/27/92).) If you have any further questions, please feel free to write again. Sincerely,

Sophia H. Chung
Tax Counsel
SHC:rz

cc: --- --- District Administrator (--)