Did sales or use tax apply when an owner contributed a debt-free aircraft to a corporation without stock, assumed debt, or other consideration?

Plain-English summary

An individual had paid use tax when buying an aircraft and owned it free of liens. He planned to contribute it to a corporation without receiving stock, securities, an assumption of debt or liability, or anything else in return.

California concluded that the contribution was not a sale or purchase because there was no actual consideration. An FAA-required bill of sale reciting formal consideration would not change that result if the corporation in fact gave nothing for the aircraft.

The opinion also treated the aircraft as mobile transportation equipment. Under the rules discussed, the corporation would be the consumer of the leased aircraft, and its later charter or lease use was not subject to use tax because it acquired the aircraft in a transfer for which its use was not taxable. The letter noted that fair-rental-value tax applied only if a lessor elected that method for its use-tax liability.

Common questions

Did calling the transfer a capital contribution make it exempt?

The result rested on the absence of actual consideration, not the label alone.

Would a nominal recital in an FAA bill of sale create tax?

No, provided it was only a federal formality and no consideration was actually paid or received.

Did the opinion also address leasing the aircraft?

Yes. It concluded that this aircraft's later lease or charter was not subject to sales or use tax under the mobile-transportation-equipment analysis described in the letter.

Citations and references

• California Revenue and Taxation Code sections 6006(a), 6006(g)(4), 6010(a), 6010(e)(4), 6023, 6092.1, and 6094(d)
• California Sales and Use Tax Regulation 1661

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/495-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/495-0468.pdf

Original ruling text

495.0468

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-5550

March 3, 1989

W--- N. G--H--- and M--XXX --- ---, XXh Floor
--- ---, California XXXXX-XXXX
Re:

H--- B. K--- and
G--- B--- Corporation

Dear Mr. Greene:
This is in response to your letter dated February 2, 1989. You ask that we confirm that the transfer of an aircraft by H--- B. K--- to G--- B--- Corporation is not subject to sales or use tax, and that the subsequent charter or lease by G--- of the aircraft to Mr. K--- or others will not be subject to sales or use tax. Mr. K--- purchased the aircraft in September, 1987. He filed a Consumer Use Tax Return with respect to his purchase of the aircraft and paid the use tax. Mr. K--- is the sole owner of the aircraft, free and clear of all liens and encumbrances. He now plans to transfer the aircraft to G---. G--- will not pay any consideration to Mr. K--- or any other person in exchange for the contribution of the aircraft to its capital and, in particular, will not issue any stock or other securities or assume any indebtedness or other liability in connection with the transfer. However, you note that in order to make an effective transfer of the aircraft for federal regulatory purposes, Mr. K--- may be required by the FAA to execute a document entitled “Bill of Sale” which recites formalities of consideration. You state that any such recital of consideration in the Bill of Sale would be made only for purposes of complying with FAA requirements and, in fact, G--- will furnish no consideration to Mr. K---. You cite Revenue and Taxation Code sections 6006(a) and 6010(a) for the proposition that a transfer of tangible personal property that is not in exchange for some consideration is not a sale or purchase under the Sales and Use Tax Law. We agree. The completion of the Bill of Sale for FAA purposes will not change this conclusion provided there actually is no consideration paid by G--- or received by Mr. K--- in exchange for the transfer of the aircraft. Since the transfer will not be a sale or purchase, there is no sales or use tax with respect to the transfer.

W--- N. G--H--- and M---

-2-

March 3, 1989
495.0468

We also agree that the aircraft is mobile transportation equipment (MTE) under Revenue and Taxation Code section 6023, and that its lease is not a sale or purchase under the Sales and Use Tax Law (Rev. & Tax. Code §§ 6006(g)(4), 6010(e)(4)). That is, the lessor is the consumer of leased MTE. Tax is due on the fair rental value of lased MTE Only when the lessor elects to pay its use tax liability in this manner. (See Rev. & Tax. Code §§ 6092.1, 6094(d), Reg. 1661.) G--- will acquire the aircraft in a transfer for which G---’s use of the aircraft will not be subject to use tax. Therefore, G---’s lease of the aircraft, which is regarded as G---’s own use, is also not subject to use tax. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Tax Counsel

DHL/smt