What sales-tax consequences followed when an individual received assets in a corporate liquidation and contributed them to a new corporation solely for stock?

Plain-English summary

An unnamed client proposed buying all outstanding shares of a closely held corporation, dissolving it, receiving its assets for the canceled shares, and transferring those same assets to a newly formed corporation solely for its initial stock.

Assistant Counsel John H. Knowles said the liquidating distribution was not a sale under section 6006 because the surrendered shares would have no value when canceled and the owner supplied no other consideration such as assumed liabilities.

The owner's later transfer to Newco was a sale. Under the Board's stated historical position, however, initial stock used to capitalize a corporation had zero value until the asset transfer was completed, leaving zero gross receipts by which to measure sales tax. Separately, sections 6006.5 and 6367 made the owner's sale occasional and exempt unless the owner made a series of sales or used the assets in a taxable business enterprise.

The source provides no proof the client, corporations, stock purchase, dissolution, distribution, incorporation, asset transfer, stock issuance, or any tax event existed or occurred. It gives no property, price, stock value, liability, gross receipts, rate, computation, assessment, or later outcome.

Two-step characterization, alternative historical routes, and missing outcome

The letter answers an absent December 27, 1962 inquiry from N---, K---, B--- & B--- law offices, attention T--- F. K---. It calls the taxpayer only a client, describes the two steps in four sentences, and supplies no question beyond the request for sales-tax consequences, documents, attachments, or procedural posture.

Step one began with the client buying every outstanding share of a closely held corporation. The client would dissolve it and receive its assets in exchange for the stock. No corporation, jurisdiction, shareholder, share class or count, purchase date or price, agreement, financing, liabilities, asset class or value, seller's permit, business, creditor, tax record, or dissolution procedure is included.

Knowles says the Board's position was that a liquidating dividend did not constitute a section 6006 sale when assets were exchanged only for shares that became valueless through cancellation and no other consideration passed. He specifically uses assumed liabilities as an example of consideration that would change the premise. No share cancellation, liability discharge, creditor consent, distribution, book entry, or completed liquidation is supplied.

Step two had the individual form a new corporation, transfer the same assets to it, and receive only stock. Knowles characterized this as a section 6006 sale. But he said the Board historically imposed no sales-tax liability where stock exchanged for capitalization assets had zero value until after transfer, making the gross-receipts measure zero. The source supplies no stock-valuation authority, valuation date, stock rights, corporate capitalization, appraisal, asset valuation, measure, or explanation of how current law would treat the sequence.

Knowles gave a distinct exemption route. Unless the individual made a series of sales or used the assets in a taxable business enterprise, the sale to Newco would be occasional under section 6006.5 and exempt under section 6367. The source provides no sales history, asset holding or use, business activity, permit, timing, intent, other property, exemption certificate, return, or audit evidence.

The opinion contains a source-printed typographical form, The board as taken the position, preserved verbatim below. The live annotation silently renders the rule without that defect; neither wording supplies the underlying Board authority beyond the three cited statutes.

The live annotation closely follows the complete letter and preserves both steps, section citations, no-sale liquidation, sale characterization, historical zero gross receipts, occasional-sale alternative, disqualifiers, and January 3, 1963 date. It omits the December 27 request; client and law firm; canceled-share no-value and assumed-liability details; stock's after-transfer timing; source typo; missing records; and absent transaction and tax outcome.

What this means for you

Owners liquidating and reincorporating a business

Each step has a separate characterization. Document purchase, cancellation, liabilities, distributions, asset identity, Newco formation, stock issuance and value, and closing order. Any liability assumption or other consideration could change the liquidation result.

Accountants and tax professionals

Trace stock value at each time, canceled shares, every debt, cash, note and asset, sales history, business use, gross receipts, exemption support, and reporting. The letter's 1963 zero-value theory and occasional-sale rule require current-law review.

Common questions

Q: Was the liquidating distribution treated as a sale?
A: No, on the stated facts of cancelled valueless shares and no other consideration.

Q: Was the shareholder's contribution to the new corporation a sale? A: Yes, but the letter treated gross receipts as zero because the initial stock had no pre-transfer value.

Q: Could assumed liabilities change the liquidation result? A: Yes. The source specifically distinguished liability assumption or other consideration.

Q: When could the individual's transfer be occasional?
A: When it was not part of a sales series and the individual did not use the assets in a taxable business.

Q: Were zero gross receipts and occasional-sale treatment the same rule?

A: No. The letter first gave a zero-measure theory for initial stock, then independently said the owner's sale would be occasional if the sales-series and taxable-business-use disqualifiers were absent.

Q: What assets and liabilities were involved?

A: The source identifies none and supplies no schedule, value, debt, or consideration record.

Q: Did the Board establish the new shares' value?

A: No valuation is supplied. The letter states the historical premise that initial stock had zero value until after the asset transfer completed.

Q: Did either transfer occur or produce tax?

A: The source gives no completed purchase, dissolution, distribution, corporation formation, transfer, stock issuance, return, audit, assessment, payment, claim, appeal, or outcome.

Citations and references

• California Revenue and Taxation Code §§ 6006, 6006.5, and 6367
• December 27, 1962 law-firm inquiry — described but not included
• Client, corporations, outstanding shares, purchase, dissolution, cancellation, assets, liabilities, distribution, Newco formation, initial stock, valuation, sales history, business use, gross receipts, tax rate and computation, return, audit, assessment, payment, claim, appeal, and outcome — described or implicated but not included

Verbatim support

From the official January 3, 1963 John H. Knowles opinion:

Therefore, the transfer to the client by the existing corporation does not constitute a sale.

The sale by the private individual of assets received from the corporation in exchange for stock constitutes a sale under section 6006.

However, the board has taken the position that receiving stock in exchange for assets with which the corporation is capitalized incurs no sales tax liability because the gross receipts by which the sales tax is measured is zero in this case (i.e., when the value of the stock is zero until after the transfer is completed).

Furthermore, unless there is a series of sales by the individual, or he uses the assets in a taxable business enterprise, the sale by him to the corporation would be an occasional sale under section 6006.5, and exempt from taxation under section 6367.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.2280
• Original supporting opinion: 395.2280 PDF

Original ruling text

395.2280

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

January 3, 1963
Law Offices of
N---, K---, B--- & B--XXX --- --- Street
--- --- XX, California
Attention:

Mr. T--- F. K---

Gentlemen:
This is in reply to your letter of December 27, 1962 which inquires as to the sales tax consequences of the following transaction: A client buys all the outstanding stock of a closely held corporation. He dissolves the corporation and receives its assets in exchange for the stock. He then forms a new corporation by transferring the same assets to it, and receives from it only stock. The board as taken the position that a liquidating dividend does not constitute a sale under section 6006 of the California Sales and Use Tax Law (Revenue and Taxation Code) [i.e., the assets are distributed in exchange only for shares which will have no value because they will be cancelled, and no other consideration such as assumption of liability is transferred]. Therefore, the transfer to the client by the existing corporation does not constitute a sale. The sale by the private individual of assets received from the corporation in exchange for stock constitutes a sale under section 6006. However, the board has taken the position that receiving stock in exchange for assets with which the corporation is capitalized incurs no sales tax liability because the gross receipts by which the sales tax is measured is zero in this case (i.e., when the value of the stock is zero until after the transfer is completed). Furthermore, unless there is a series of sales by the individual, or he uses the assets in a taxable business enterprise, the sale by him to the corporation would be an occasional sale under section 6006.5, and exempt from taxation under section 6367. Very truly yours,

John H. Knowles
Assistant Counsel
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