Did related corporations' plant transfers for promissory notes qualify as exempt occasional sales?

Plain-English summary

A parent with five wholly owned direct subsidiaries described three transfers to subsidiary Corporation 3. Corporation 2 transferred a plant and equipment for a promissory note; Corporation A transferred a similar plant and equipment for another note; and the parent transferred manufacturing plants X and Y for a note. The parent said it caused the subsidiary transfers to carry on operations more economically.

Associate Tax Counsel John H. Murray treated the transfers by Corporations 2 and A as occasional sales under section 6006.5(b). His conclusion says each moved all or substantially all its property to a commonly owned corporation.

The parent's transfer was conditional. If plants X and Y were all or substantially all property the parent held or used in an activity requiring a seller's permit, the transfer also fit the occasional-sale definition. If they were not, it did not. The letter supplies no facts or later decision resolving that condition.

Corporate structure, three transfers, source defects, and absent outcome

The June 29 letter responds to a redacted law firm and person identified only as Mr. M. W. D---. It says their June 22, 1954 letter requested sales-tax advice about certain transactions; that request and all attachments are absent.

The described parent had five wholly owned subsidiaries. Subsidiaries 1 and 5 each owned two additional wholly owned subsidiaries, called A and B and C and D. The source supplies no names, organizational chart, stock records, ownership dates, jurisdictions, businesses, tax registrations, consolidated-return treatment or corporate agreements.

The parent owned two manufacturing plants, X and Y. To carry on unspecified operations more economically, it caused Corporation 2 to transfer a plant and equipment to Corporation 3 for a promissory note and caused Corporation A to transfer a similar plant and equipment to Corporation 3 for another note. It separately transferred X and Y to Corporation 3 for a promissory note. The record does not identify any plant, location, equipment, transfer or note date, principal, interest, maturity, security, payment, liability, title, possession, accounting entry, value or closing.

The request reportedly said each transfer included tangible personal property consisting of machinery, equipment, automotive equipment, raw materials, supplies and some finished inventory. The next clause is malformed in both the PDF text and visible rendering: it says the transfers represent all or substantially Units X and Y are separate manufacturing plants of CORPORATION A, the parent) of the property of the subsidiaries. The source supplies neither the missing wording nor punctuation.

That parenthetical also calls Corporation A the parent, after the preceding paragraph calls Corporation A a subsidiary whose transfer the parent caused. Later, the conclusion again calls Corporation A a subsidiary and treats the X-and-Y plants as property of the parent corporation without naming it. This page does not choose between the conflicting labels.

Despite the defective quoted sentence, Murray's own conclusion expressly says Corporations 2 and A each transferred all or substantially all its property to commonly owned Corporation 3. He therefore treated those two movements as occasional sales under section 6006.5(b). The letter does not explain whether commonly owned refers to direct or indirect ownership, reproduce the statute, cite a regulation or case, or discuss allocation among tangible personal property, inventory and any other assets.

For X and Y, Murray said the statement of facts did not establish whether those plants were all or substantially all property the parent held or used in an activity requiring a seller's permit. The answer is binary: the transfer fit section 6006.5(b) if that condition was met and did not fit if it was not. No supplemented facts, ruling, return, audit, assessment, claim, appeal or transaction outcome is included.

The live 395.2540 annotation substantially reproduces the letter's structure, listed property, two affirmative conclusions and conditional parent analysis. It silently supplies all after the malformed all or substantially phrase and prints the Corporation A parenthetical, but it does not resolve why the supporting letter separately identifies Corporation A as a subsidiary. The live summary also states that X and Y are separate manufacturing plants of Corporation A, the parent; the source's role conflict remains disclosed rather than harmonized.

The official two-page PDF has a clean rendered text layer and only a small seal image, not scanned body pages. Two fresh PDF downloads and text extractions matched exactly, and the preserved original-text tail remains byte-identical after removal of only pdftotext's terminal newline and form feed. No case citation appears.

What this means for you

Corporate groups consolidating plants

Common ownership did not settle every transfer. Counsel applied the all-or-substantially-all test separately to each transferor, and the parent's result remained conditional because its retained seller-permit-activity property was unknown.

Accountants and tax professionals

Inventory every transferor's permit-activity property before analyzing a group reorganization. Preserve the ownership chart, transfer agreements, asset schedules, note terms, values and post-transfer holdings; this letter shows that one group's transfers can receive different answers.

Common questions

Q: What consideration did the transferors receive?
A: Each described transfer was in return for a promissory note. No note terms or payments are supplied.

Q: What property moved?

A: The request reportedly included plants and tangible personal property such as machinery, equipment, automotive equipment, raw materials, supplies and some finished inventory. No asset schedule, quantity or value is included.

Q: Why did the two subsidiary transfers qualify?
A: Counsel said each transferred all or substantially all its property to commonly owned Corporation 3.

Q: Did counsel definitely exempt the parent's transfer of plants X and Y?
A: No. The facts did not establish whether those plants were all or substantially all of the parent's relevant property.

Q: What fact controlled the parent's result?
A: Whether X and Y were all or substantially all property the parent held or used in an activity requiring a seller's permit.

Q: Which corporation was the parent?

A: The source does not resolve that cleanly. It initially distinguishes the unnamed parent from subsidiary Corporation A, but a malformed parenthetical calls Corporation A the parent.

Q: Did the source provide a final tax or audit result?

A: No. It gives two affirmative advisory conclusions and one conditional answer, without a return, audit, assessment, claim, appeal or later outcome.

Citations and references

• California Revenue and Taxation Code § 6006.5(b)
• June 22, 1954 advice request and supporting facts — referenced but not included
• Parties and corporate records; transaction and plant documents; asset schedules; promissory notes and payments; values; seller's permits and sales activity; returns; audit; assessment; claim; appeal; and outcome — absent

Verbatim support

From the official June 29, 1954 letter:

We think that the transfers by subsidiary Corporation 2 and subsidiary Corporation A to the subsidiary Corporation 3, being in each case transfers of all or substantially all of the property of those corporations to a commonly owned corporation, are occasional sales within the meaning of Section 6006.5(b).

It is not clear from your statement of facts whether manufacturing plants X and Y constitute all or substantially all of the property of the parent corporation held or used in the course of an activity for which a seller’s permit is required.

However, if these units are not all or substantially all of the property held or used by the parent corporation in an activity requiring a seller’s permit, then this transfer would not be an occasional sale within the meaning of Section 6006.5(b).

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.2540
• Original supporting opinion: 395.2540 PDF

Original ruling text

395.2540

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

June 29, 1954

F---, A--- & B--Attorneys at Law
--- --- Building
--- XX, California

Attention:

Mr M. W. D---

Gentlemen:
In your letter of June 22, 1954, you request our advice as to the application of sales tax to certain transactions. We understand that a parent corporation has five wholly-owned subsidiaries. Subsidiary 1 and subsidiary 5 each own two wholly-owned subsidiaries which you call A and B, and C and D, respectively. The parent corporation owns two manufacturing plants which you call X and Y. In order to carry on certain operations more economically, the parent corporation (a) caused subsidiary Corporation 2 to transfer a plant and its equipment to subsidiary Corporation 3 in return for a promissory note, and (b) caused subsidiary Corporation A to transfer to Corporation 3 a similar type of plant and equipment in return for a promissory note. The parent corporation transferred the two manufacturing plants X and Y to Corporation 3 in return for a promissory note. You state: “In each case, the transfers (a) include tangible personal property – machinery – equipment – automotive equipment – raw materials – supplies and some finished inventory; and (b) represent all or substantially Units X and Y are separate manufacturing plants of CORPORATION A, the parent) of the property of the subsidiaries. We think that the transfers by subsidiary Corporation 2 and subsidiary Corporation A to the subsidiary Corporation 3, being in each case transfers of all or substantially all of the property of those corporations to a commonly owned corporation, are occasional sales within the meaning of Section 6006.5(b).

F---, A--- &
B---

-2-

June 29, 1954
395.2540

It is not clear from your statement of facts whether manufacturing plants X and Y constitute all or substantially all of the property of the parent corporation held or used in the course of an activity for which a seller’s permit is required. If so, we think that transfer also would fall within the occasional sale definition of Section 6006.5(b). However, if these units are not all or substantially all of the property held or used by the parent corporation in an activity requiring a seller’s permit, then this transfer would not be an occasional sale within the meaning of Section 6006.5(b).

Very truly yours,

John H. Murray
Associate Tax Counsel

JHM:tj

cc:

Oakland - Compliance