Did mutual rescission make a garage-fixture sale nontaxable when the seller kept the down payment and additional reimbursement?

Plain-English summary

A buyer took possession of a garage business and its fixtures and equipment for more than a year. After disputes and foreclosure litigation, the parties settled: the buyer returned the assets, while the seller retained the $1,300 down payment and received another $2,250 for merchandise used.

California said the original asset transfer was taxable when possession passed, even though the seller retained title as security. Mutual rescission did not erase that taxable event.

Returned-merchandise relief also failed because all consideration was not restored. Keeping both payments meant the seller had not returned the full amount received.

Common questions

Did retaining title as security prevent a sale?

No. Section 6006(c) treated transfer of possession with title retained as security as a sale.

Did returning all the assets make the first sale nontaxable?

No.

Why did the return deduction fail?

The seller retained part of the purchase consideration.

Citations and references

• Cal. Rev. & Tax. Code § 6006(c) — sale includes transfer of possession with title retained as security
• Historical California Rulings 61 and 64 — sale timing and full-restoration rules cited by the source

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/490-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/490-0220.pdf

Original ruling text

STATE OF CALIFORNIA

490.0220

STATE BOARD OF EQUALIZATION

December 14, 1953

We have reviewed your letter of December 1, the bill of sale dated 4-30-51, the compromise agreement of December 1952, your earlier correspondence and several reports from our district office. It is our opinion, based on all the available facts, that the tax was properly redetermined; in other words, that the transfer of the garage fixtures and equipment was properly subject to the sales tax. It appears that the buyer was given possession of the garage and, in fact, was in possession of the business and fixtures for over one year. The seller understood that he performed his obligations under the original agreement, but the buyer contended that he was not secure in the transaction claiming that Mrs. “X” did not subscribe her signature to the original bill of sale, that the goodwill was transferred, but that “X” kept doing business in the name of “X Garage and X Motors,” that “X” removed merchandise from the premises which were supposed to have been transferred, and that “X” kept a key to the garage. Therefore, after the seller filed suit to foreclose the mortgage, an out-of-court settlement was reached whereby the seller retained the down payment ($1,300.) and received another sum ($2,250.) in reimbursement of merchandise used. The purchaser returned all of the assets sold.
§6006(c) of the California Sales and Use Tax Law defines a “sale,” for sales tax purposes, as including a transaction whereby the possession of property is transferred with the seller retaining the title as security for the payment of the price. The taxable event arises when the property is transferred. See also the last paragraph of Sales and Use Tax Ruling 61 (copy enclosed). Obviously, “old” Ruling 64 (copy enclosed), which has since been amended to do away with the 90 day requirement but which was in effect when the property was returned, was not satisfied. In fact, present Ruling 64 (copy enclosed), in effect since 9-9-53, would also not be satisfied since all consideration was not restored.

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December 14, 1953
490.0220

Accordingly, the fact that the sale was rescinded by mutual agreement does not result in nontaxability. In view of the foregoing, we would suggest that the amount of tax, penalty, and interest be paid. A claim for refund should be filed with this board if you still are of the opinion that the transaction is not properly subject to the tax. The claim must be in writing but it may be in letter form. It should state the specific grounds upon which the claim is founded. The amount now due is $208.94 including interest computed to 12-31-53. Additional interest of .92 per month will accrue after that date.