Did use tax apply when boat interests shifted first through bankruptcy abandonment and then through a divorce property award?

Plain-English summary

Two married couples jointly owned a boat through a partnership and were jointly and severally liable for its debt. One couple entered bankruptcy, was discharged, and properly abandoned its interest. The remaining couple later divorced, and the boat's equity and liability were awarded to the husband.

California treated the bankruptcy transfer as occurring by operation of law without consideration. The remaining owners already owed the full debt, so taking the abandoned interest did not increase their legal liability. Without consideration, there was no purchase and no use tax.

The divorce transfer received the same treatment under the stated assumptions. The court awarded the husband the boat equity and liability while the wife received other community property and debts of equivalent value. The shift occurred by operation of law, not consideration, so it was not a taxable purchase.

Common questions

Did relief of the bankrupt couple's debt create consideration from the remaining owners?

No. The source said the relief arose by operation of law, and the remaining owners were already liable for the entire debt.

Did the divorce award create a taxable purchase by the husband?

No under the assumed equivalent division of community assets and debts.

What records did the source recommend keeping?

Documents proving the bankruptcy abandonment, divorce, and resulting property settlement.

Citations and references

• California Revenue and Taxation Code sections 6010(a), 6201, and 6596

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/495-0476.pdf

Original ruling text

495.0476

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-8485

August 28, 1991

D--- I. N--Assistant Vice-President
--- --Consumer Loan Center
Box XXXX
---, CA XXXXX
Re:

Taxable Effect of Bankruptcy Abandonment/Divorce

Dear Mr. N---:
This is in response to your letter of June 13, 1991, requesting our opinion as to whether use tax applies in the event of the bankruptcy abandonment and divorce of various co-owners of a boat. In our opinion, these events constitute two separate transactions, each of which we will discuss in turn. Facts and Assumptions You described the facts in this matter as follows: “The bank is reviewing a request to refinance an existing boat loan for balance only; no monies will be disbursed in the transaction. When originally funded in 1980, the boat was registered in the name of a partnership comprised of four partners; two married couples. In 1987 two of the partners (one couple)
[‘Couple A’] abandoned their interest in the partnership due to a bankruptcy filing. Of the remaining two partners (one couple) [‘Couple B’], a divorce awarded as ‘his sole and separate property’ interest in the partnership thus leaving only on party remaining of the original four parties. “It is the intent of the Bank and remaining borrower to refinance the balance only and to re-register the boat into his name alone since he is the only remaining interested partner in the asset following the aforementioned partners abandoned interest. In light of this abandoned interest, it would appear that there is no ‘consideration’ being given to the abandoned parties in our electing to refinance and register in his name alone. As such, it would appear that use tax need not be collected.”

D--- L. N---

-2-

August 28, 1991
495.0476

For the purposes of this opinion, we assume that: the Bank has a perfected security interest in the boat; there are no other liens or security interests in the boat; Couple A and the bankruptcy trustee or debtor-in-possession properly abandoned all interests in the boat partnership; the bankruptcy court approved the abandonment by the bankruptcy trustee or debtor-in-possession; Couple A has received a discharge in bankruptcy; all four of the original co-owners are California residents; all four of the original co-owners were jointly and severally liable for the entire boat debt; and the boat is located and used in California. Section 6596 Non-Reliance Disclosure Please note that this response is not one upon which your client may rely within the provisions of California Revenue and Taxation Code Section 6596 because your client is not identified. Rather, this is an opinion regarding a set of hypothetical facts. Sales and Use Tax – General Discussion Except to the extent specifically excluded or exempted by statute, the Sales and Use Tax Law, California Revenue and Taxation Code (Section 6001 et seq.) imposes an excise tax in connection with the retail sale of all tangible personal property sold or purchased for use in this state. (All statutory citations are to the California Revenue and Taxation Code, unless otherwise noted herein.) To the extent there is a tax in connection with the above-described facts, it would be a use tax pursuant to Section 6201, which imposes tax on the storage, use, or other consumption in this state of tangible personal property purchased from any retailer. Section 6010(a) defines a “purchase” as “…any transfer of title or possession, exchange or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration…”
[Emphasis added].
Bankruptcy Abandonment
When Couple A and the bankruptcy estate abandoned their interests in the boat partnership, Couple B succeeded to their interests, becoming sole owners of the partnership. As the bank’s security interest was properly perfected, the debt was unimpaired and Couple B effectively acquired Couple A’s interest subject to the Bank’s debt. Couple A was relieved of their portion of the overall boat-debt by virtue of their discharge in bankruptcy. This relief of debt occurred by operation of law, irrespective of any formal assumption of debt by Couple B. In fact, as Couple B was already jointly and severally liable for the entire debt, there was no increase in their legal liability by virtue of their acquisition of Couple A’s interest. As there is not consideration in a transfer by operation of law, there is no purchase pursuant to Section 6010(a). Without a purchase, there can be no use tax liability. Accordingly, in our opinion, the bankruptcy abandonment by Couple A is not subject to use tax.

D--- L. N---

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August 28, 1991
495.0476

Divorce
When Couple B divorce and all interests in the boat were awarded to the husband, the bank’s security interest was once again unimpaired and the husband effectively acquired the wife’s interest in the boat partnership subject to the Bank’s debt. We assume this was accomplished through the divorce property settlement as a division of community property such that the husband was awarded all of the equity in the boat and the wife was awarded other community assets of equivalent value. Accordingly, we assume that the husband retained the entire boat liability and the wife retained other community debts of equivalent value. The effect of this is similar to the bankruptcy abandonment discussed above. This relief of debt occurred by operation of law as part of the division of community assets and debts. Once again, we conclude that there is no consideration in a transfer by operation of law and without consideration, there is no purchase pursuant to Section 6010(a) and without a purchase, there can be no use tax liability. Accordingly, in our opinion, the divorce property settlement award of the boat to the husband is not subject to use tax. Please note that the husband is advised to retain for his records documentary evidence to substantiate the occurrence of the bankruptcy abandonment, as well as the divorce and resulting property settlement. If you have any further questions, please do not hesitate to write to us again. Cordially,

Victoria Lani Arena
Tax Counsel

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