Did a subsidiary's piecemeal equipment transfers to its parent over more than three years count as one occasional transfer of substantially all property?

Plain-English summary

A wholly owned subsidiary regularly moved equipment to its parent beginning in 1967 and continuing through the February 1971 memorandum, reportedly toward closing the subsidiary's plant. The parent was building a new Fresno facility to be partly equipped with that property. Memo invoices showed net book value, but no sales agreement or bill of sale existed. Until physical transfer, the subsidiary kept equipment in its asset accounts, used it and claimed depreciation.

Tax Counsel treated each equipment transfer as a separate sale under section 6006. Three or more in a 12-month period would constitute an activity requiring a seller's permit. Piecemeal deliveries over more than three years were not one transfer of all or substantially all property under Regulation 1595(b)(2) and section 6006.5.

The parent's alleged power to demand all equipment did not prove title had passed in 1967. Without documentary evidence of a legally binding all-assets sale, the subsidiary's possession, use, accounting and depreciation strongly suggested retained title until each physical transfer. The source supplies no transfer count, tax computation, audit result or later outcome.

Transfer record, taxpayer argument, permit tension, and absent outcome

Oakland Auditing requested an opinion by memorandum dated December 11, 1970; that memorandum and its attachments are absent. The February 10 response is from Headquarters Tax Counsel identified only as JM and does not give a full author name.

The redacted subsidiary was wholly owned by parent X. Equipment had moved regularly from subsidiary to parent from 1967 to the memorandum date, described as ostensively for the ultimate purpose of closing the subsidiary plant. The parent was constructing a new Fresno facility that would use some of the equipment. No plant, construction record, shutdown plan, completion date, equipment list, quantity, delivery schedule, board approval or business reason is included.

Memo invoices evidenced physical transfers at net book value. General-journal entries relieving the subsidiary's asset accounts were prepared on a summary basis and were not necessarily concurrent with delivery. The subsidiary kept using and depreciating equipment until transfer. No invoice, ledger, entry, depreciation schedule, value, consideration, title document or physical-delivery record is supplied.

The source says the equipment was not used in an activity requiring a seller's permit and that no substantial or numerous equipment sales went to third parties. Counsel nonetheless said three or more of these related-party transfers within 12 months would put the subsidiary in an activity requiring a seller's permit. The source gives neither a count nor dates sufficient to show whether that threshold was actually crossed in any year.

Taxpayer argued that the long series was one occasional sale because the board intended one sale and title allegedly passed in 1967, when the parent supposedly could demand immediate possession of any or all equipment. Counsel for both corporations said board minutes evidenced that intent, but none was presented. There was no sales agreement or bill of sale, and no document showed that the parent was legally obligated to take the remaining property.

Counsel concluded that each physical transfer was a separate sale. Regulation 1595(b)(2) protected a transfer of all or substantially all property, not piecemeal individual items delivered over more than three years. Continued asset-account treatment, possession, business use and depreciation strongly suggested that the subsidiary retained title until each physical transfer.

The alleged ability to demand possession did not establish a completed sale. Counsel said the parent conceivably might never demand the remaining property. The source supplies no later demand, remaining-asset disposition, plant closure, final transfer, seller's permit, return, audit adjustment, assessment, payment, claim, appeal or outcome.

The live 395.2550 annotation preserves the piecemeal three-year history, contemplated all-assets transfer, no occasional-sale result and failure of the parent's possession authority to establish one sale. It omits the Fresno facility, memo invoices, nonconcurrent journal entries, continued use and depreciation, seller-permit-activity statements, third-party-sales limitation, asserted board minutes, missing documents and absent outcome.

The official PDF has a clean rendered text layer. Two fresh downloads and extractions matched despite harmless marked-content parser warnings, and the preserved source tail remains byte-identical after removal of only pdftotext's terminal newline and form feed. It preserves source spellings such as ostensively, ultimat, ther, more then and concievable. No case citation appears.

What this means for you

Parent and subsidiary corporations

A long-term wind-down plan and common ownership did not combine recurring equipment deliveries into one exempt transfer when the supposed earlier sale and title passage were undocumented.

Accountants and tax professionals

Reconcile board minutes, contracts, bills of sale, invoices, asset ledgers, journal-entry dates, depreciation, possession and delivery dates. Count transfers within each 12-month period and document the permit analysis; intent alone was insufficient here.

Common questions

Q: Did the planned shutdown create one sale of all assets?
A: No. The memorandum found separate physical transfers without documents proving an earlier all-or-substantially-all-assets sale.

Q: What facts suggested the subsidiary retained title?
A: It possessed and used the equipment, kept it in its asset accounts and depreciated it until physical transfer.

Q: Did the parent's ability to demand possession prove title passage?
A: No. No document established the authority or a legal obligation to take the remaining property, which the parent might never demand.

Q: When could recurring transfers require a permit?
A: The memorandum said three or more transfers in a 12-month period would do so.

Q: How were transfers recorded?

A: Memo invoices used net book value, while summary journal entries were not necessarily concurrent with physical delivery. The records themselves are absent.

Q: Were the board minutes reviewed?

A: No. Counsel for the corporations asserted that minutes showed a one-sale intent, but no documentary evidence was presented.

Q: Did the plant close and was tax assessed?

A: The source supplies no final shutdown, remaining-property transfer, tax measure, audit adjustment, assessment or later outcome.

Citations and references

• California Revenue and Taxation Code §§ 6006 and 6006.5
• California Sales and Use Tax Regulation 1595(b)(2)
• Oakland Auditing memorandum dated December 11, 1970 — referenced but not included
• Board minutes; possession authority; sales agreement; bill of sale; equipment and transfer schedule; memo invoices; journal entries; asset ledger; depreciation; seller's permit; return; audit; assessment; payment; claim; appeal; and outcome — described, asserted or implicated but not included

Verbatim support

From the official February 10, 1971 memorandum:

It is our opinion that each individual “transfer” of equipment by Subsidiary to Parent constitutes a separate and distinct sale within the meaning of section 6006.

We do not believe that the regulation (and section 6006.5) contemplate the piecemeal transfers of individual items over a period of more then three years as “a transfer of all or substantially all the property”.

The retention of the equipment in the asset accounts of Subsidiary, the possession and use in its business activities and the claiming of depreciation on such assets strongly suggests that it has retained title to the property until the physical transfer to Parent.

There is no documentary evidence that it is legally obligated to do so.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.2550
• Original supporting opinion: 395.2550 PDF

Original ruling text

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum
395.2550
To:

Oakland – Auditing (LHW)

From:

Tax Counsel (JM) - Headquarters

Subject:

Date:

February 10, 1971

In your memorandum of December 11, 1970 you request our opinion as to whether or not there is an exempt occasional sale as contemplated by regulation 1595 under the following facts. We understand that ---. (Subsidiary) is a wholly-owned subsidiary of X (Parent). Beginning in 1967 and continuing to the present, equipment has regularly been transferred from Subsidiary to Parent ostensively for the ultimat purpose of closing down the Subsidiary plant. Parent is building a completely new facility in Fresno to be partially equipped with this equipment. The physical transfers are evidenced by memo invoices which show the net book value of the asset transferred. General journal entries relieving Subsidiary’s asset accounts are prepared on a summary basis not necessarily concurrent with the physical transfer. The equipment is being used and depreciated by Subsidiary until the date of transfer. The assets are not used in an activity requiring the holding of a seller’s permit. There are no substantial or numerous other sales of equipment to third parties. There is no sales agreement or bill of sale in existence. Taxpayer contends that the piecemeal transfers over a long period of time constitute an occasional sale since the board of directors intended that ther be one sale and that title has passed to Parent since Parent allegedly could demand and take immediate possession of all or any part of the equipment. Counsel for both corporations asserts the intention of the board of directors is evidenced by the minutes of such board. No documentary evidence has been presented in support of the contention.

It is our opinion that each individual “transfer” of equipment by Subsidiary to Parent constitutes a separate and distinct sale within the meaning of section 6006. Furthermore,

Oakland – Auditing (LHW)

-2-

February 10, 1971
395.2550

if three or more such transfers have occurred in a twelve-month period, Subsidiary is engaged in activities requiring the holding of a seller’s permit. Regulation 1595(b)(2) provides that tax does not apply to a transfer of all or substantially all of the property…. Accordingly, the transaction is not an “occasional” sale unless the transfer is of all or substantially all the property. We do not believe that the regulation (and section 6006.5) contemplate the piecemeal transfers of individual items over a period of more then three years as “a transfer of all or substantially all the property”. Absent documentary evidence to demonstrate that a sale of all or substantially all of the property of the subsidiary did occur, and expressly providing that title did pass to Parent in 1967 as contended, the transfers cannot be considered as an occasional sale. Taxpayer’s contention appears inconsistent with the facts. The retention of the equipment in the asset accounts of Subsidiary, the possession and use in its business activities and the claiming of depreciation on such assets strongly suggests that it has retained title to the property until the physical transfer to Parent. The fact that taxpayer asserts that Parent could, at any time, demand and take immediate possession of the assets does not necessarily lead to the conclusion that a sale has occurred and that title has passed. It is concievable that Parent may never demand and take possession of the remaining property. There is no documentary evidence that it is legally obligated to do so.

JM:smb

395.2550 (12-23-04)redacted.doc