Was a subsidiary's transfer of furniture and fixtures to its parent taxable when both companies recorded it as a dividend?

Plain-English summary

A subsidiary transferred furniture and fixtures to its parent. The property was less than 80 percent of the subsidiary's tangible personal property, both companies recorded the transfer as a dividend, and the subsidiary reduced retained earnings.

California concluded that a dividend in kind was not a sale if no consideration of any kind passed from the parent to the subsidiary. Simplifying the subsidiary's accounting was not the type of intangible benefit that made this transfer a sale.

An incorporated October 6, 1998 counsel note clarifies that consideration would include the parent's assumption of debt or intercompany debt created in connection with the transfer. The source therefore requires examining the actual economics, not just the dividend entries.

Common questions

Were the accounting entries enough by themselves?

They supported dividend treatment, but the opinion also required no consideration to pass to the subsidiary.

Can a noncash benefit create a sale?

Yes. The memorandum said consideration could include intangible benefits, although simplified accounting alone was not enough here.

Why does this page use a 1998 date?

The official source appends a signed October 6, 1998 note that expressly identifies assumed and intercompany debt as consideration. The underlying memorandum remains dated July 22, 1976.

Citations and references

• No numbered statute or regulation appears in the official 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/495-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/495-0725.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Orange County – Auditing (RFC)

From:

Headquarters – Tax Counsel (HLC)

Subject:

S--- F--- P---, Inc.
XXX S. --- Street
---, CA XXXXX

495.0725

July 22, 1976

SZ -- XX XXXXXX

This is in reply to your memorandum dated July 13, 1976, which was addressed to Mr. G. Rigby. You inquire as to the tax applicable to a tranfer of furniture and fixtures from subject taxpayer to taxpayer’s parent corporation, S--- F--- I---, Inc. We understand that the transfer comprised less than 80 percent of the tangible personal property owned by taxpayer. Taxpayer’s books show the transfer as a dividend paid; the parent company’s books show the transfer as a dividend received. Corresponding entry was made to taxpayer’s retained earnings account. Dividends, including dividends in kind, are not sales. If there is no evidence of consideration of any kind passing from the parent to the subsidiary, we would conclude that the transfer in this case is not subject to tax. If there was consideration of any kind comprising even intangible benefits to taxpayer, we would consider the transfer a taxable sale. Taxpayer’s statement that the transfer simplified taxpayer’s accounting is not, however, the type of intangible benefit that would cause the transfer to be considered a sale.

HLC:js
“Consideration” would, of course, include any assumption of indebtedness by the transferee, or any intercompany debt incurred in connection with the transfer. DHL 10/6/98