Which steps in a three-part corporate liquidation and asset reorganization were subject to California sales tax?

Plain-English summary

A California parent owned a manufacturing subsidiary. Under an April 24, 1959 agreement, it also bought all stock of a Nevada corporation doing business in California, whose assets were all in California. The parent proposed three transactions on September 30, and Associate Tax Counsel John H. Murray expressly assumed they would occur in the stated sequence.

First, the Nevada subsidiary would liquidate into the parent, transferring all assets and liabilities in exchange for its outstanding stock. The letter says the transaction would be structured under Internal Revenue Code section 334(a). Murray found no tax because it was either a sale for resale or an occasional sale under California section 6006.5(b).

Second, the parent's manufacturing subsidiary would also liquidate into the parent, transferring all assets and liabilities for its outstanding stock. Staff treated that transfer as a nontaxable occasional sale under section 6006.5(b).

Third, the parent would retransfer the former Nevada subsidiary's assets and liabilities to the manufacturing subsidiary for common stock with a stated value of $1,415,000 and a $500,000 ten-year note bearing 5 percent interest. The letter says this step would be structured under federal section 351 and would appear not to be an occasional sale. It applied tax to gross receipts from tangible personal property other than inventory bought for resale.

The live annotation adds a materially different qualification from an absent August 7, 1959 source: the third step could satisfy the all or substantially all test if the former Nevada subsidiary's tangible property represented at least 80 percent of all tangible property held by the parent. That test and the live (Am. 2004–2) notation do not appear in the supporting PDF.

Proposed sequence, federal labels, source/live conflicts, and missing outcome

The opinion responds to the accounting firm's July 24 letter, which is not included. It identifies the parent and subsidiaries only through redactions, and does not supply the April 24 stock-purchase agreement, corporate records, stock certificates, approvals, financial statements, asset or liability schedules, contracts, or contemplated September 30 transfer documents.

The parent had bought all Nevada-subsidiary stock under the April agreement. The source says the subsidiary did business in California and all its assets were in California, but gives no business, location, property, inventory, customer, permit, activity, value, liability, tax basis, or stock-purchase price.

Step one exchanged all subsidiary assets and liabilities for all its outstanding stock. The source labels the intended federal provision section 334(a). It gives two alternative California grounds—sale for resale or occasional sale—but does not state what property the parent held for resale, identify a resale certificate, or analyze the section 6006.5(b) elements. No asset use, liquidation filing, cancellation of stock, liability succession, or completed transfer is supplied.

The live annotation labels step one under federal section 334(b), not source-printed 334(a), and adds that the parent made no use of the assets other than transferring them to the manufacturing subsidiary. The supporting letter does not state that no-use fact. No source in this record resolves the subsection conflict or supplies the added use history.

Step two moved all manufacturing-subsidiary assets and liabilities to the parent under federal section 332. Murray treated it as an occasional sale under section 6006.5(b). No manufacturing assets, inventory, liabilities, stock surrender, liquidation filing, value, seller's-permit activity, series of sales, or exemption calculation is supplied.

Step three moved the assets and liabilities originally received from the Nevada subsidiary into the manufacturing subsidiary. Its stated consideration was $1,415,000 of common stock plus the $500,000 note, a combined face or stated amount of $1,915,000 before any valuation or allocation issue. No share count, stock value evidence, note, interest schedule, payment, security, assumed-liability amount, asset allocation, gross receipts, rate, or resulting tax appears.

The July 29 letter says step three did not appear occasional and taxes gross receipts from tangible personal property other than resale inventory. It does not identify all or substantially all, an 80-percent threshold, denominator property, or August 7 analysis. The source also prints all of the asses formerly owned—an apparent error preserved verbatim below.

The live annotation adds that section 6006.5(b)'s all or substantially all requirement would be satisfied if the former Nevada subsidiary's tangible property was at least 80 percent of total tangible property held by the parent. It prints 7/29/59; 8/7/59. (Am. 2004–2). No August 7 writing, amendment text, 80-percent computation, property numerator or denominator, asset value, or explanation of how that addition relates to the July 29 contrary conclusion is supplied in the official PDF.

The federal sections describe the intended form in the request; Murray did not give a federal tax opinion or confirm that any step qualified. No evidence shows any transaction occurred September 30 or later. The source supplies no closing, title passage, asset use, resale, inventory disposition, return, reported or assessed gross receipts, tax, audit, payment, claim, appeal, or outcome.

The live entry preserves the three-step sequence and California treatment at a high level, but omits the July 24 request; April 24 acquisition; Nevada corporation's California business and in-state assets; exact stock and note terms; source's 334(a) wording; missing records and transaction outcome; and the conflict between its 80-percent qualification and the supporting letter's unqualified step-three conclusion.

What this means for you

Corporate groups reorganizing subsidiaries

Separate each legal transfer. Two liquidation steps were nontaxable, while the later stock-and-note transfer produced tax.

Accountants and tax professionals

Track legal order, title and use between steps, every asset and liability, stock and note value, inventory and resale support, and the all-or-substantially-all numerator and denominator. A requested federal structure does not prove qualification or decide California tax.

Common questions

Q: Was the Nevada subsidiary's liquidation taxable?

A: No. Staff characterized it as either a sale for resale or an occasional sale.

Q: Was the manufacturing subsidiary's liquidation taxable?

A: No. Staff treated it as an occasional sale under section 6006.5(b).

Q: Why was the third transfer different?

A: The July 29 letter says it did not appear occasional and involved stock plus a $500,000 note. The live annotation later adds a possible 80-percent route.

Q: Did tax apply to every asset in the third step?

A: No. The letter excluded inventory purchased for resale from the taxable tangible personal property.

Q: What stock and note were promised in step three?

A: Common stock with a stated value of $1,415,000 and a $500,000 ten-year note bearing 5 percent interest.

Q: Does the source cite federal section 334(a) or 334(b)?

A: The supporting letter says 334(a); the live annotation says 334(b). No included record resolves the conflict.

Q: What is the live annotation's 80-percent test?

A: It says the third step meets all or substantially all if re-transferred former-subsidiary tangible property is at least 80 percent of all tangible property held by the parent.

Q: Is the August 7, 1959 analysis included?

A: No. Only the live annotation prints that date and the added test.

Q: Did the three September 30 transactions occur or produce a stated tax?

A: The source does not say; it is a prospective opinion with no closing or outcome records.

Citations and references

• California Revenue and Taxation Code § 6006.5(b)
• Internal Revenue Code §§ 332, 334(a), and 351 — supporting letter's proposed federal treatment
• Internal Revenue Code § 334(b) — conflicting live-annotation label
• July 24, 1959 request and April 24, 1959 stock-purchase agreement — described but not included
• August 7, 1959 source and 2004–2 amendment text — cited by the live annotation but not included
• Corporate, asset, liability, stock, note, liquidation, transfer, use, resale, inventory, value, all-or-substantially-all computation, gross-receipts, return, tax, audit, assessment, payment, claim, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official July 29, 1959 John H. Murray opinion:

We assume that the above-shown transactions will occur in the sequence above.

The transfer of all of the assets of P--- Corporation to C--- Company in exchange for all of the outstanding stock of P--- would not be subject to tax under the Sales and Use Tax Law, since the transaction is either 1) a sale for resale or 2) an occasional sale as defined in Section 6006.5(b).

The transfer of all of the assets of C--- Mfg. Co to C--- Company in exchange for all of the outstanding stock of C--- Mfg. Co. is not subject to sales tax since the transaction is an occasional sale as defined in Section 6006.5(b).

The transfer of all of the asses formerly owned by P--- Corporation from C--- Company to C--- Mfg. Co. in exchange for stock and a note would appear not to be an occasional sale as defined in Section 6006.5 and tax would apply to the gross receipts from the sale of the tangible personal property involved other than inventory purchased for resale.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.2160
• Original supporting opinion: 395.2160 PDF

Original ruling text

395.2160

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

July 29, 1959

R---, L--- and P--Certified Public Accountants
XXXX --- Street
---, CA
Attention:

Mr. A--- D. P--RE:

The C--- Company
Account -- – XXXXX

Gentlemen:
In your letter of July 24, you ask for our advice as to the application of the California sales tax to the following transactions: The C--- Company, a California corporation, owns all of the stock of C--- Mfg. Co., which is presently engaged in a manufacturing operation. Under an agreement executed April 24, 1959, the C--- Company purchased all of the stock of the P--- Corporation, a Nevada corporation, doing business in California. All of the assets of P--- are located within the State of California. The C--- Company now proposes to adopt the following course of action:

1. On September 30, 1959, C--- will liquidate P--- into itself. Pursuant to this
   liquidation, P--- will transfer to C--- all of its assets and liabilities. C--- will transfer all of the stock of P--- to that company in exchange for the net assets. This transaction will be consummated so as to come within the terms of Section 334(a) of the Internal Revenue Code.
2. On September 30, 1959, all of the assets and liabilities of C--- Mfg. Co. will be
   transferred to the C--- Company in liquidation. This transaction will be consummated in such a manner as to come within Section 332 of the Internal Revenue Code.
3. On September 30, 1959, the C--- Company will transfer all of the assets and liabilities
   of P---, which were received upon the liquidation of P--- to C--- Mfg. Co. in exchange for common stock with a stated value of $1,415,000 and a ten-year note for $500,000 bearing interest at 5%. This transaction will be consummated in such a manner as to come within Section 351 of the Internal Revenue Code.

R---, L--- & P--Re: The C--- Company
Account -- XXXXX

-2-

July 29, 1959
395.2160

We assume that the above-shown transactions will occur in the sequence above. From the information presented we think that the sales tax would apply to each of the above transactions in the following manner:

1. The transfer of all of the assets of P--- Corporation to C--- Company in exchange for
   all of the outstanding stock of P--- would not be subject to tax under the Sales and Use Tax Law, since the transaction is either 1) a sale for resale or 2) an occasional sale as defined in Section 6006.5(b).
2. The transfer of all of the assets of C--- Mfg. Co to C--- Company in exchange for all
   of the outstanding stock of C--- Mfg. Co. is not subject to sales tax since the transaction is an occasional sale as defined in Section 6006.5(b).
3. The transfer of all of the asses formerly owned by P--- Corporation from
   C--- Company to C--- Mfg. Co. in exchange for stock and a note would appear not to be an occasional sale as defined in Section 6006.5 and tax would apply to the gross receipts from the sale of the tangible personal property involved other than inventory purchased for resale. If you have any further questions concerning this matter, please feel free to write to us. Very truly yours,

John H. Murray
Associate Tax Counsel
JHM:rg
cc:

--- – Administrator