After subsidiaries merged into their parent immediately before an asset closing, were the subsidiaries' permit activities attributed to the parent seller?

Plain-English summary

Grocery-store lessor X held a seller's permit because it operated locations for short periods between lessees. Wholly owned subsidiaries Y and Z also had to hold permits. X agreed February 21, 1964 to sell its own property and property of Y, Z and another subsidiary A, with subsidiaries to merge into X before the sale's effective date. The source does not state whether A had permit activity.

The modified effective date was close of business March 15, while closing and statutory merger occurred March 17 when a certificate of ownership was filed. The merger therefore did not occur before the so-called effective date. Counsel addressed whether equipment formerly used by Y and Z in taxable activities should be treated as held or used by X when sold.

The memorandum concluded that it should. Under the cited merger statutes, the subsidiaries ceased separate existence and their property, rights, liabilities, privileges, franchises, obligations, and activities became part of the surviving parent. Even if different persons conducted the activity and sale before merger, Y's and Z's taxable activities became X's activities for at least a moment before or with the closing transfer.

Three subsidiaries, date sequence, statutory and case reasoning, and missing outcome

The internal request from San Diego auditing is not separately included. X, Y, Z, A, buyers, grocery locations and lessees are unidentified. The source gives no lease, interim-operation dates, sales, seller's permits, returns, equipment, property, value, or evidence of why X, Y and Z required permits. A's permit status and activity are not stated.

The February 21 agreement covered all X property plus Y, Z and A property and required pre-effective-date mergers. A later agreement changed the effective date to close of business March 15. Closing and certificate filing occurred March 17. No original or modified contract, signature, buyer, price, consideration, condition, property schedule, bill of sale, title record, certificate, Secretary of State filing, timestamp, or closing document appears.

Section 6006.5 defined an occasional sale to include property not held or used in the seller's permit activity if the sale was not part of a series sufficient in number, scope and character to require a permit. Counsel expressly assumed X's transfer was not one of a series. No prior or later equipment sale, frequency, scope, character, customer, invoice, or series analysis is supplied.

Former Corporations Code section 4116 made the survivor succeed without another transfer to constituent rights and property and take debts and liabilities. Former section 4124 vested a wholly owned merged subsidiary's estate, property, rights, privileges and franchises in its parent subject to liabilities, obligations and creditor rights. The source supplies no debt, obligation, creditor, release, payment, or property succession record.

Mutual Building & Loan Association of Pasadena v. Wiborg, 59 Cal. App. 2d 325, supported continuity of corporate activities through the new channel after consolidation. E. & J. Gallo Winery v. Commissioner, 227 F.2d 699, supported treating the survivor as the taxpayer entitled to a merged corporation's unused excess-profits credit. Both printed citations resolved to the named cases.

Counsel used those authorities to treat subsidiary equipment as held or used by X in permit activity. The source says different persons may have conducted the taxable activity and asset sale but attributes the activities to X for at least a moment of time. It does not determine each asset's use, sale price, taxable measure, exemption, rate, local tax, return, audit adjustment, assessment, payment, claim, appeal, or final outcome.

The live annotation preserves the parent and two permit-holding subsidiaries, sale agreement, planned pre-effective merger, same-day merger and sale documents, integral-part rationale, and date. It omits subsidiary A; February 21 agreement, March 15 effective date and March 17 filing/closing; failure to merge before the effective date; occasional-sale series assumption; former statutes and quoted succession terms; case citations; at-least-a-moment qualification; missing records; and absent tax outcome.

What this means for you

Parent companies selling assets after a merger

A brief interval between a subsidiary merger and an asset sale does not necessarily erase the subsidiary's prior use of the property in a taxable business.

M&A teams and tax professionals

Map the original and modified effective date, legal filing time, closing time, seller and buyer identities, each subsidiary and asset, permit activities, sale-series history, statutory succession, rights and liabilities, consideration, tax measure, and actual reporting. Do not erase a two-day date gap by calling the merger simply pre-closing.

Common questions

Q: When did the merger legally occur?
A: March 17, 1964, when the certificate of ownership was filed.

Q: Why did the March 15 contractual effective date not control? A: The memorandum treated the statutory merger as occurring on the later filing date.

Q: Were the subsidiaries' activities attributed to the parent? A: Yes. They became part of the surviving corporation along with their property and liabilities.

Q: Did counsel assume the parent's asset transfer was part of a series? A: No. The analysis assumed it was not part of a series of equipment sales.

Q: Was every subsidiary's permit activity described?

A: No. Y and Z required permits; A's property was also sold, but the source does not state A's activity or permit status.

Q: Did the merger occur before the contractual effective date?

A: No. The modified effective date was March 15, while certificate filing and closing occurred March 17.

Q: How long did the merged activities belong to X before sale?

A: Counsel says for at least a moment of time; the source supplies no filing or closing timestamps.

Q: What property value or tax measure resulted?

A: The source does not say.

Citations and references

• California Revenue and Taxation Code § 6006.5
• Former California Corporations Code §§ 4116 and 4124
• Mutual Building & Loan Association of Pasadena v. Wiborg, 59 Cal. App. 2d 325
• E. & J. Gallo Winery v. Commissioner of Internal Revenue, 227 F.2d 699
• February 21, 1964 sale agreement, subsequent effective-date modification, March 17 merger certificate and closing records — described but not included
• Request, parties, buyers, subsidiaries, permits, activities, lessees, property, equipment, values, consideration, series, rights, debts, liabilities, tax measure, return, audit, assessment, payment, claim, appeal, and outcome records — described or implicated but not included

Verbatim support

From the visually reviewed official July 30, 1964 internal Tax Counsel memorandum:

Hence, the merger did not actually occur before the so-called "Effective Date" of sale.

We assume that the transfer of assets by "X" was not one of a series of equipment sales.

However, for at least a moment of time, the activities of the merged corporation became the activities of the surviving corporation.

It seems reasonable to conclude, therefore, that the activities of the subsidiaries may be attributed to the surviving corporation for sales tax purposes.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.2060
• Original supporting opinion: 395.2060 PDF

Original ruling text

395. 2060 .,

San Diego - Auditing (WLW)
)

July 30, 1964

Tax Counsel (PM)
"X"

You have asked for our opinion on the taxability of the following transaction: "X", a grocery store lessor, held a seller's permit in order to operate specific locations for short interim periods between lessees. It had two wholly owned subsidiaries which were also required to hold sellers' permits: "Y" and "Z" . On February 21, 1964, "X" entered into an agreement whereby it agreed to sell to certain buyers all of its own property and the property owned by "Y", "Z", and "A" (another subsidi­ ary). The agreement provided that before the effective date of sale the subsidiaries would be merged into "X 11 • As modified by subsequent agreement, the effective date was the close of business March 15, 1964; the closing date, March 17, 1964. The merger of the parent and the subsidiaries occurred on March 17, 1964, upon the filing of a certifi­ cate of ownership pursuant to Section 4124 of the Corporations Code. Hence, the merger did not actually occur before the so-called "Effec­ tive Date" of sale.

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The question raised by these facts is whether the tax applies not only to the transfer of equipment held or used by "X" in a taxable activity, but also to the transfer of equipment held or used in the taxable ac­ tivities of "Y" and "Z". Section 6006.5 of the Sales and Use Tax Law defines an "occasional sale" as including "A sale of property not held or used by a seller in the course of an activity for which he is required to hold a seller's permit, provided such sale is not one of a series of sales sufficient in number, scope and character to constitute an activity requiring the holding of a seller's permit . " We assume that the transfer of assets b y "X" was not one of a series of equipment sales . The precise ques­ tion, therefore, is whether the property acquired b y merger can be re­ garded as being held or used by "X" in the course of an activity re­ quiring a seller's permit . It is our conclusion that the property should be so regarded because the seller was not a new entity separate and distinct from the merged corporations. On the contrary, the subsidiaries became a part of the parent company, and the latter became the holder of all their rights and interests. In other words, the separate existence of the subsidi­ aries was terminated by the merger, but their rights and interests were absorbed by the surviving corporation. The general effect of a merger is set forth in Section 4116 of the Corporations Code . This section provides, in part, as follows:

395.2060
-2-

July 30, 1964

"Upon merger or consolidation pursuant to this article, the separate existence of the constituent corporations ceases, and the consolidated or surviving corporation shall succeed, without other transfer, to all the rights and property of each of the constituent corporations, and shall be subject to all the debts and liabilities of each, in the same manner as if the consolidated or surviving corporation had itself incurred them." The effect of a merger of a wholly owned subsidiary pursuant to Section 4124 is described in similar terms, as follows: "Thereupon, all of the estate, property, rights, privileges and franchises of the merged corporation shall vest in and be held and enjoyed by the parent corporation as fully as the same were before held and enjoyed by the merged corpora­ tion but subject to all liabilities and obligations of the merged corporation and the rights of all creditors thereof." Interpreting comparable provisions in the Bank Act of 1909, the court in Mutual Building and Loan Association of Pasadena v . Wiborg, 59 Cal. App. 2d 325, held:

)

"Although the distinct corporate entity of Title Guarantee passed out of existence or became extinct upon the comple­ tion of the act of consolidation, its corporate activities did not cease but were continued and carried on through a new channel ••. The consolidation did not create an entirely new entity but 'merely directs the blood of the old corpor­ ation into the veins of the new, the old living in the new.'" In E. & J. Gallo Winery v. Commissioner of Internal Revenue, 227 F.2d 699, the court considered the question of whether or not, after a mer­ ger pursuant to the California statutes, a surviving corporation is en­ titled to carry over any unused excess profits credit of the merged corporation. Citing the Mutual Building case, the court found that, under California law, the old corporation became an integral part of the surviving corporation. It ruled, accordingly, that the surviving corporation was the "taxpayer" entitled to use the excess profits tax credit of the merged corporation. The above cases appear to be authority for the proposition that the as­ sets formerly owned by its subsidiaries were held or used by "X" in an activity requiring a seller's permit. It may be true that the taxable activity was conducted by one "person" and the sale of assets was made by another. However, for at least a moment of time, the activities of the merged corporation became the activities of the surviving corpora­ tion. It seems reasonable to conclude, therefore, that the activities of the subsidiaries may be attributed to the surviving corporation for sales tax purposes.

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