Did a parent owe use tax when it continued using ex-tax resale equipment after its leasing subsidiary merged into it?

Plain-English summary

A parent acquired equipment ex tax for resale and transferred it ex tax for resale to its subsidiary. The subsidiary leased the equipment back to the parent and reported tax on rental receipts, but excluded property taxes paid by the parent. When rental receipts equaled about one-third of the equipment's purchase price, the wholly owned subsidiary merged into the parent under Nevada law.

The parent used most of the equipment after merger. The memorandum concluded that the parent became subject to use tax when it acquired and used that equipment through the merger, in the same way the subsidiary would have become liable by terminating the leases and using the property. The subsidiary's legal person continued in the survivor, carrying the equipment's ex-tax status and obligation into the parent.

No parent use tax applied to items sold after merger without prior use or used solely outside California after merger. The merger transfer itself was not a taxable use by the subsidiary because the parent alone effected it and the subsidiary exercised no right or power over the equipment incident to ownership.

The Board separately concluded that the parent-paid personal property taxes belonged in the subsidiary's taxable rental receipts. Putnam directed reductions to both determinations and warned that the reaudit appeared to reduce the subsidiary's determination for only some equipment rather than all leased equipment involved in the merger.

Two taxpayers, Nevada mechanism, tax paths, reaudit instructions, and missing outcomes

T. P. Putnam sent the Headquarters Petition Unit the memorandum with an instruction to schedule the matter for final action. It concerns two redacted accounts and gives statements of Board action for each. The petition, staff submissions, determinations, reaudit, and later notices are not included.

The parent first acquired equipment ex tax for resale and then transferred it ex tax for resale to the subsidiary. No vendor, purchase date, equipment list, purchase price, invoice, title, resale certificate, transfer date, agreement, value, consideration, or reported purchase tax appears. The source does not explain why the parent first acquired the equipment before putting it into the subsidiary.

The subsidiary leased the equipment back to the parent for an unstated period. It reported tax on rentals but excluded personal property taxes paid by the parent-lessee. At merger, rental receipts equaled about one-third of purchase price. No lease, term, rent, invoice, property-tax bill, payment, return, reporting period, tax reimbursement, tax rate, one-third calculation, or purchase-price amount is supplied.

Former Nevada Revised Statutes section 78.540, as summarized, allowed a wholly owned subsidiary to merge into its parent when the parent filed a certificate of ownership and board resolution to merge the subsidiary and assume its obligations. The parent then acquired all subsidiary liabilities and obligations. No statute text, ownership record, board resolution, certificate, filing, effective time, or Nevada agency record is included.

Under Revenue and Taxation Code sections 6094 and 6244 and former Ruling 70(c)(3)(C), Putnam treated the parent's post-merger acquisition and use as taxable in the manner that lease termination and own use would have taxed the subsidiary. Mutual Building & Loan Association v. Wiborg, 59 Cal. App. 2d 325; Gallo Winery v. Commissioner, 227 F.2d 699; and Koppers Co. v. United States, 134 F. Supp. 290 supported continuation of the subsidiary's person, ex-tax property status, and obligation in the surviving parent. Independent citation verification resolved all three reporters to the source-named cases.

The source identifies no item, California location or use, first functional-use date, depreciation, value, measure, rate, return, assessment, or parent liability amount. It says only that most equipment was used by the parent after merger.

Sections 6008, 6009, and 6009.1 supported excluding equipment sold after merger without prior use and equipment used solely outside California after merger. The initial fact summary says some property was sold or shipped outside the state without the petitioner's functional use after merger; the Board statement says sold or shipped out without taxable use. No purchaser, sale, invoice, shipment, destination, delivery, outside-state use, functional-use record, return, deduction, exemption, or excluded amount is supplied.

The merger transfer did not itself constitute the subsidiary's taxable use. Putnam said the subsidiary exercised no right or power incident to ownership within section 6009 because the parent alone took the action producing merger and transfer. The source supplies no subsidiary vote, consent, corporate act, title action, control evidence, or competing position.

For the parent, Putnam directed the determination be reduced by tax on items sold or shipped outside California after merger, according to the reaudit. For the subsidiary, he directed removal of tax on all leased equipment involved in the merger because merger acquisition by the parent was not the subsidiary's use. He warned that the reaudit appeared to eliminate only items later sold or shipped outside California from the subsidiary determination. No original or revised tax, item count, property category, penalty, interest, reaudit schedule, adjusted determination, notice, Board order, payment, claim, appeal, or final implementation is included.

The subsidiary still owed rental tax measured by the personal property taxes the parent-lessee paid before merger. The source supplies no property-tax jurisdiction, bill, assessed value, payment, lease clause, allocation, reporting period, rental measure, rate, or resulting tax.

The live annotation preserves the survivor's post-merger use-tax liability and the continuation of the subsidiary's person, ex-tax status, and obligation. It omits the parent's original purchase and transfer to the subsidiary; leases and rental receipts; approximately one-third purchase-price fact; parent-paid property taxes; Nevada merger mechanics; three cases and all statutes; sold and out-of-state-used equipment; merger-not-use analysis; both Board determinations and reduction instructions; reaudit defect; missing records; and absent final adjusted outcomes.

What this means for you

Parent companies merging leasing subsidiaries

A merger may not itself be the taxable use, yet the survivor's later functional use of ex-tax resale equipment can trigger use tax.

Accountants and tax professionals

Trace each asset from original ex-tax purchase through intercompany transfer, lease, merger, and disposition. Separate survivor use, unused sale, exclusive out-of-state use, the merger act itself, and pre-merger rental measure; reconcile each item to the determination and reaudit.

Common questions

Q: Why did the parent inherit the use-tax obligation?
A: The subsidiary continued in the surviving parent, along with the property's ex-tax status and obligations.

Q: Was every merged equipment item taxable to the parent?
A: No. Items sold or shipped outside California without taxable post-merger use were excluded.

Q: Was the merger itself a taxable use by the subsidiary?
A: No. The parent alone took the statutory action effecting the merger.

Q: Were lessee-paid property taxes included in rental receipts?
A: Yes. The subsidiary had to include property taxes paid by the parent before merger.

Q: How much of the purchase price had been recovered through rentals?

A: The memorandum says rental receipts were about one-third of purchase price at merger, but gives no amounts or calculation.

Q: How was the parent determination changed?

A: It was to be reduced by tax on items sold or shipped outside California after merger without taxable use, according to the reaudit.

Q: How was the subsidiary determination changed?

A: It was to remove tax on all leased equipment involved in the merger while retaining the rental-measure treatment of parent-paid property taxes.

Q: What was wrong with the reaudit?

A: Putnam said it appeared to remove only equipment later sold or shipped outside California from the subsidiary determination, rather than all leased merger equipment.

Q: Were final adjusted tax amounts supplied?

A: No. The memorandum instructs final action but includes no amounts, revised notices, payments, or later outcome.

Citations and references

• California Revenue and Taxation Code §§ 6008, 6009, 6009.1, 6094, and 6244
• Former California Sales Tax Ruling 70(c)(3)(C)
• Former Nevada Revised Statutes § 78.540
• Mutual Building & Loan Association v. Wiborg, 59 Cal. App. 2d 325
• E. & J. Gallo Winery v. Commissioner of Internal Revenue, 227 F.2d 699
• Koppers Company v. United States, 134 F. Supp. 290
• Petition, ex-tax purchases and transfer, equipment, leases, rental and property-tax records, Nevada merger resolution and filing, California and outside-state use, sales and shipments, returns, determinations, reaudit, adjustments, notices, payments, claims, appeals, and outcomes — described or implicated but not included

Verbatim support

From the official September 23, 1971 T. P. Putnam memorandum:

The person of the subsidiary continued in the parent as the surviving corporation in the statutory merger and the ex tax status of the property and the obligation of the subsidiary with respect to it carried over to the parent

Use tax does not apply, however, with respect to those items of equipment sold after the merger without prior use or those used solely outside the state after the merger

The merger and transfer was effected by the action of the parent alone.

The determination agains A--- M--- Company should be reduced by the amount of the tax on all of the leased equipment involved in the merger.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.2150
• Original supporting opinion: 395.2150 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

395.2150

To:

Headquarters – Petition Unit

September 23, 1971

From:

T. P. Putnam

Subject:

G--- F. A--- Company

SR -- XX XXXXXX

A--- M--- Company

SR -- XX XXXXXX

Please schedule this matter for final action. The facts involved are that G--- F. A--Company acquired equipment ex tax for resale and then transferred it to its subsidiary, A--- M--Company, ex tax for resale. The subsidiary leased the equipment to the parent for a period of time and reported tax on the rental receipts, exclusive of property taxes paid by the parent. The subsidiary was then merged into the parent pursuant to section 78.540 of the Nevada Revised Statutes. That section provides, in substance, that a wholly owned subsidiary may be merged into its parent by action of the parent in filing a certificate of ownership and a resolution of its board of directors to merge the subsidiary and assume its obligations, whereupon the parent acquires all of its liabilities and obligations. At the time of the merger, the rental receipts equalled about a third of the purchase price of the equipment. Most of the equipment was used by the parent after the merger. Some of it, however, was sold or shipped outside the state without functional use by petitioner after the merger. It is my opinion that the parent became subject to use tax when it acquired and used the equipment pursuant to the merger, in the same manner that the subsidiary would have become subject to use tax based on sections 6094 and 6244 of the Revenue and Taxation Code and ruling 70(c)(3)(C), by terminating the leases and using the property. The person of the subsidiary continued in the parent as the surviving corporation in the statutory merger and the ex tax status of the property and the obligation of the subsidiary with respect to it carried over to the parent (Mutual Building & Loan Association v. Wiborg, 59 Cal. App 2d 325; Gallo Winery v. Commissioner, 227 F. 2d 699; Koppers Co. v. United States, 134 F. Supp. 290). Use tax does not apply, however, with respect to those items of equipment sold after the merger without prior use or those used solely outside the state after the merger (sections 6008, 6009, 6009.1 of the Revenue and Taxation Code). The transfer of the equipment to the parent pursuant to the merger was not itself a taxable use by the subsidiary, since under the particular facts, the subsidiary exercised no right or power

Headquarters – Petition Unit
SR -- XX XXXXXX; SR -- XX XXXXXX

-2-

September 23, 1971
395.2150

incident to ownership, within the meaning of section 6009 of the Revenue and Taxation Code. The merger and transfer was effected by the action of the parent alone. The subsidiary was, however, obligated to include the property taxes paid by the parent prior to the merger in the taxable rental receipts. The determination against G--- F. A--- Company should be reduced by the amount of the tax on items sold or shipped out of the state after the merger, per the reaudit. The determination agains A--- M--- Company should be reduced by the amount of the tax on all of the leased equipment involved in the merger. Please note that the reaudit figures appear to require adjustment in this respect, since the reaudit apparently would eliminate from the determination agains A--- M--- Company only those items subsequently sold or shipped out of the state. The statements of board action for each determination are as follows: 1.

G--- F. A--- Company
The board concluded that petitioner became subject to use tax with respect to the equipment acquired by petitioner’s subsidiary, A--- M--Company, ex tax for resale, leased by the subsidiary to petitioner and then acquired and used by petitioner pursuant to the statutory merger of the subsidiary into petitioner. The person of the subsidiary continued in petitioner as the surviving corporation in the statutory merger and the ex tax status of the equipment and the obligation of the subsidiary with respect to it carried over to petitioner. The board also concluded, however, that use tax did not apply with respect to those items of equipment which were sold or shipped out of the state without taxable use after the merger.

2.

A--- M--- Company
The board concluded that personal property taxes paid by the parent-lessee of the equipment in question were properly included in the measure of tax on the rental receipts of petitioner. The board also concluded, however, that the acquisition of the equipment by the parent, G--- F. A--- Company, pursuant to the statutory merger, did not constitute a taxable use by petitioner.

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