Why was selling television-station assets for cash taxable in liquidation when an in-kind liquidating dividend would not be a sale?

Plain-English summary

A corporation operating television stations in several states sold five stations to five purchasers during 1983 and 1984, including one California station. The disputed April-through-June 1983 liability was measured by $7.8 million of unreported fixtures-and-equipment sales. The corporation said the stations were sold under a federally tax-free liquidation plan and argued that a liquidation should not be taxed because an in-kind property distribution would not be a sale.

Hearing Officer H. L. Cohen rejected that equivalence. Section 6006 treated a tangible-property title transfer for consideration as a sale, and there was no exemption for liquidation sales as such. Selling property and later distributing cash was different from distributing property itself to shareholders without consideration.

The California station sale was also part of a five-station series, including out-of-state transactions. Section 6019 treated more than two retail sales within twelve months as retailer activity, and section 6005 recognized the corporation—not each station division—as the person. Cohen recommended redetermination without adjustment, leaving the $7.8 million measure unchanged at that stage; no final Board action is included.

Petition, liquidation argument, five-sale series, recommendation, and missing outcome

The petitioner filed for redetermination by an April 22, 1985 letter, which is not included. A preliminary hearing was held October 27, 1986 in Sacramento. Two redacted CPAs appeared for the corporation; Board Tax Auditor E. Pedeupe appeared from the Petition Section. The source supplies no petition, notice, audit report, hearing transcript, exhibits, briefs, or post-hearing submission.

The protested period was April 1 through June 30, 1983, and the stated measure was $7.8 million of unreported fixtures and equipment sales. The petitioner sold five stations to five buyers during 1983 and 1984, one in California. No station, buyer, sale date, state other than California, agreement, total price, asset schedule, allocation, fixture or equipment item, gross-receipts calculation, rate, or tax amount is supplied.

The corporation described the station sales as part of a federally income-tax-free liquidation plan. It said each station was a separate operating division and the Federal Communications Commission required independent operation. It argued that the California division made only one sale and should receive occasional-sale treatment. No liquidation plan, corporate resolution, shareholder distribution, federal statute, return, ruling, FCC license, rule, order, or independent-operation record is included.

The California station held a seller's permit for videotape sales. The corporation argued that, at most, tax could reach equipment used in videotape selling activity. It cited Ontario Community Foundation, Inc. v. State Board of Equalization, 35 Cal.3d 811, and Business Taxes Law Guide Annotation 395.0380. Cohen distinguished them as single entire-business sales and described Ontario as limiting the measure for a primarily service business to property used in tangible-property sales. He said the Board had applied that principle to single television-station sales by taxing videotape-fabrication property only.

Legal research resolved 35 Cal.3d 811 to the source-named Ontario decision. The PDF does not reproduce the opinion or Annotation 395.0380, supply the California station's service and sales revenue, identify videotape equipment, prove permit activity, or calculate an alternative measure.

The corporation also argued that the Sales and Use Tax Law targeted the privilege of retail business, not going out of business; that an untaxed in-kind distribution and a sale followed by cash distribution should be treated alike; and that out-of-state transactions should not enter California's three sales rule. Those are petitioner contentions, not adopted holdings.

Section 6051 imposed sales tax on California tangible-property retail-sale gross receipts. Section 6006 included title transfer for consideration. Cohen found no liquidation-sale exemption and cited Bigsby v. Johnson, 18 Cal.2d 860, for tax on a retailer's sale of a property type it did not ordinarily sell. Legal research resolved that reporter to the named case. The source does not reproduce Bigsby or establish that every station-sale fact matched it.

Cohen distinguished an in-kind liquidating dividend: without consideration, there was no section 6006 sale. The source does not actually describe a shareholder property distribution, liability assumption, canceled stock, or other consideration in this petition. It addresses that alternative only to reject the petitioner's claimed equivalence with its cash-producing asset sales.

Sections 6367 and 6006.5 supplied the occasional-sale framework. Section 6019 deemed an entity making more than two retail tangible-property sales in twelve months a retailer. Staff counted the out-of-state station transactions because section 6006.5 asked whether the activity would require a permit if conducted in California. Section 6005 included a corporation, but not a division, in person; the five stations therefore were not separate tax sellers.

Cohen recommended Redetermine without adjustment. The January 6, 1987 signature date is the source-body formal date and controls issued_date. The recommendation leaves the $7.8 million measure unchanged at that administrative stage, but the source supplies no later reviewer signature, Board adoption, notice, final decision, payment, refund, claim, appeal, or outcome.

The official 395.0710 supporting PDF is a differently redacted copy of the same April 22 petition, October 27 hearing, period, $7.8 million measure, facts, contentions, analysis, and recommendation. It redacts the hearing officer and taxpayer representatives in the appearance section but retains Cohen's signature and adds blank audit-review lines. Its live annotation emphasizes the five-sale series; this page follows 395.2296's liquidation-sale distinction. Neither copy supplies final action.

The live 395.2296 annotation states only that liquidation sales are treated like other sales and that an in-kind liquidating dividend without assumed debt is not a sale for lack of consideration. It prints February 19, 1987. The supporting Decision and Recommendation is dated and signed January 6, 1987 and contains no February 19 review or action. No source resolves the later live date, so the document date controls and the difference remains disclosed.

The live entry omits the petition and hearing; five stations and buyers; federal, FCC, division and out-of-state arguments; videotape permit; $7.8 million measure; six statutes; two cases and annotation; recommendation posture; companion source; missing records; and absent final outcome. It also adds with no assumption of indebtedness; the source explains the broader no-consideration rule but does not describe an actual in-kind distribution or debt fact in this petition.

What this means for you

Corporations choosing a liquidation method

Selling assets for cash can produce sales tax even when a no-consideration in-kind distribution would not be a sale. Preserve sale agreements, asset allocations, liquidation steps, consideration, debts, and shareholder distributions rather than relying on the plan label.

Accountants and tax professionals

Separate the property sale from the later cash distribution and count comparable sales across jurisdictions when the rule tests activity as if conducted in California. Analyze the legal entity rather than divisions, then document permit activities and property allocation.

Common questions

Q: Why is an in-kind liquidating dividend different?
A: Without consideration or assumed debt, the property distribution is not a sale.

Q: Why was the cash sale taxable?
A: The buyer paid consideration for the tangible station assets, and no general liquidation-sale exemption existed.

Q: Did federal tax-free liquidation treatment control?
A: No. The petitioner asserted tax-free federal treatment, but the recommendation applied California sales-tax definitions independently and no federal record is included.

Q: Is this the same underlying matter as Annotation 395.0710?
A: Yes. The separate official source for 395.0710 emphasizes the related series-of-station-sales holding.

Q: What exactly was protested?

A: An April 1–June 30, 1983 liability measured by $7.8 million of unreported California-station fixtures and equipment sales.

Q: Why did four out-of-state sales count?

A: The occasional-sale test asks whether the activity would require a permit if conducted in California, and the five sales belonged to the same corporation.

Q: Did Ontario limit the measure to videotape equipment here?

A: No. Cohen distinguished the single-sale authority because this corporation made a multi-sale series. No alternative videotape-equipment measure is supplied.

Q: Did the hearing officer issue a final decision?

A: No. He recommended redetermination without adjustment. The source supplies no later Board action or outcome.

Q: Why does the live page say February 19, 1987?

A: The PDF is formally dated and signed January 6. No February 19 source, approval, or explanation is included.

Citations and references

• California Revenue and Taxation Code §§ 6005, 6006, 6006.5, 6019, 6051, and 6367
• Ontario Community Foundation, Inc. v. State Board of Equalization, 35 Cal.3d 811, and Bigsby v. Johnson, 18 Cal.2d 860 — both reporters resolved to the source-named cases
• Business Taxes Law Guide Annotation 395.0380 (April 18, 1958) — cited by petitioner; supporting material not included
• April 22, 1985 petition and October 27, 1986 preliminary hearing — identified; petition, transcript and exhibits not included
• Official companion supporting PDF for Annotation 395.0710
• Station-sale, liquidation, federal, FCC, permit, videotape, allocation, audit, recommendation-review, final-action, payment, claim, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official January 6, 1987 H. L. Cohen Decision and Recommendation:

As petitioner notes, there is no exemption for liquidation sales as such.

Where property is distributed to shareholders in kind as a liquidating dividend, there is no consideration, therefore no sale, and no tax. Under the Sales and Use Tax Law, this is distinctly different from selling the property and distributing the cash proceeds as a liquidating dividend.

Tax is being asserted here not because petitioner sold one television station in California, but because the sale of the television station in California was one of a series of sales of television stations sufficient in number (per Section 6019), scope and character to constitute an activity requiring the holding of a seller's permit.

Redetermine without adjustment.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.2296
• Original supporting opinion: 395.2296 PDF
• Companion same-matter opinion: 395.0710 PDF

Original ruling text

STATE OF CALIFORNIA

395.2296

BOARD OF EQUALIZATION
In The Matter Of The Petition
for Redetermination Under the
Sales and Use Tax Law of:
F--- C--- CORP.
Petitioner

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DECISION AND RECOMMENDATION

No. SR -- XX XXXXXX-010

The preliminary hearing on the above taxpayer’s petition for redetermination was held on October 27, 1986, in Sacramento, California. Hearing Officer:

H. L. Cohen

Appearing for Petitioner:

Mr. E--- T---, CPA
Mr. R. J. F---, CPA

Appearing for the Board

Mr. E. Pedeupe
Tax Auditor
Petition Section
Protested Item

Petitioner filed a petition for redetermination by letter dated April 22, 1985. protested tax liability for the period April 1, 1983, through June 30, 1983 is measured by: Item

The

Amount

Unreported sales of fixtures and
Equipment

$7,800,000
Contentions

Petitioner contends that:

1. The sale in question was an exempt occasional sale.
2. The Legislature did not intend to tax liquidation sales such as the sale here.
   Summary
   Petitioner is a corporation which is engaged in operating television stations in a number of states. During 1983 and 1984, petitioner sold five stations to five purchasers. One station was located in California. Tax was asserted on the gross receipts from the sale of the fixtures and equipment of the California station. The auditor concluded that the California sale was not an exempt occasional sale because petitioner made more than two such sales within a twelve-month period.

F--- C--- CORP.

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January 6, 1987
395.2296

Petitioner states that the stations were sold as part of a liquidation plan which was free of federal income tax liability. Each station was a separate operating division. Petitioner states that the Federal Communications Commission requires that each station operate independently. Petitioner contends that each division should be treated separately. The California division should be regarded as a single sale by that division and exempt as an occasional sale. Petitioner cites Ontario Community Foundation, Inc. v. State Board of Equalization, 35 Cal.3d 811 as support for its position. Petitioner also cites Business Taxes Law Guide (BTLG) Annotation 395.0380 (April 18, 1958) as support. Petitioner states that the California station held a seller’s permit for selling videotapes. Petitioner contends that at most tax could apply only to the equipment used in the videotape selling activity. Petitioner contends that a liquidation sale is not such a sale as was contemplated by the Legislature when it passed the Sales and Use Tax Law. The law is aimed at the privilege of operating, conducting, and maintaining a retail business, not on the “privilege” of going out of business. Petitioner points out that the Board does not regard in-kind distributions in liquidation as sales, and contends that there shouldn’t be any difference when there is a liquidation sale and a cash distribution. It is unfair to deprive a taxpayer of the exemption for occasional sales when the taxpayer goes out of business. Petitioner further contends that out-of-state sales should not be considered when applying the “three sales rule”. Sales tax can only apply to sale within a state; therefore, out-of-state transactions are inapplicable. Analysis and Conclusions Section 6051 of the Revenue and Taxation Code imposes the sales tax on the gross receipts from the sale of tangible personal property in this state. As petitioner notes, there is no exemption for liquidation sales as such. In the case of Bigsby v. Johnson, 18 Cal.2d 860, the court held that tax applies to sales by a retailer of property of a type not usually sold by the retailer. Thus, even though petitioner may not have sold television stations on a regular basis, in the circumstances here, petitioner was making taxable retail sales. Section 6006 defines sale to include the transfer of title to tangible personal property for consideration. Where property is distributed to shareholders in kind as a liquidating dividend, there is no consideration, therefore no sale, and no tax. Under the Sales and Use Tax Law, this is distinctly different from selling the property and distributing the cash proceeds as a liquidating dividend. Section 6367 exempts occasional sales from tax. Section 6006.5 defines “occasional sale” to include:

F--- C--- CORP.

-3-

January 6, 1987
395.2296

“(a) A sale of property not held or used by a seller in the course of activities for which he or she is required to hold a seller’s permit or permits or would be required to hold a seller’s permit or permits if the activities were conducted in this state, provided the sale is not one of a series of sales sufficient in number, scope, and character to constitute an activity for which he or she would be required to hold a seller’s permit if the activity were conducted in this state.” (Emphasis added.) Section 6019 provides that any entity which makes more than two retail sales of tangible personal property during any twelve-month period shall be considered a retailer. Tax is being asserted here not because petitioner sold one television station in California, but because the sale of the television station in California was one of a series of sales of television stations sufficient in number (per Section 6019), scope and character to constitute an activity requiring the holding of a seller’s permit. In short, petitioner is regarded as a retailer of television stations. Section 6005 defines person to include “corporation” but not “division”. There is no basis for treating petitioner’s television stations as separate entities. Petitioner’s reliance on Ontario and the cited annotation is misplaced. Those situations involved a single sale of an entire business. In Ontario, the Board had imposed the tax on the entire amount for which the tangible personal property had been sold. The court held that since the plaintiff was engaged primarily in providing services, only the sale of property utilized in the making of sales of tangible personal property could be taxed. Since Ontario, we have in fact applied this principal to single sales of television stations. Only property used to fabricate videotapes for retail sale was taxed. That is different from petitioner’s situation and the difference is of critical importance. The “three sale rule” does not come into play on single sales. Recommendation Redetermine without adjustment.

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H. L. Cohen, Hearing Officer

1-6-87
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Date