Was an automobile dealer's transfer of one-third of its assets to each of two shareholders tax-exempt when they surrendered their stock but the corporation continued?

Plain-English summary

An automobile dealer operated several sales-and-service branches. To comply with the manufacturer's decentralization policy, two of its three shareholders each surrendered a one-third stock interest in exchange for one-third of the corporation's assets, allowing separate entities to be created at the branches. The corporation itself did not dissolve, in part because the remaining shareholder was said to face a large capital-gain tax if it did.

The memorandum treated each property-for-stock exchange as taxable rather than as an exempt ratable distribution in kind. It relied on an earlier Board position that a corporation's transfer of furniture and fixtures to a shareholder in return for stock being retired under a stated-capital reduction was taxable. Here, there was not even positive evidence that the surrendered shares were retired.

The Board read its historical liquidation bulletins narrowly. Their exemption applied only when a plan called for the corporation's entire dissolution and distribution of all assets to shareholders in return for all corporate stock. A partial liquidation by a continuing corporation did not qualify under that analysis.

Common questions

Did calling the contract a plan of partial liquidation make the transfers exempt?

No. The memorandum looked to the corporation's continued existence and the absence of a complete distribution of all assets.

Why did the status of the surrendered stock matter?

The source found no positive evidence that the stock was retired, giving even less support for treating the exchange like a complete dissolution.

What kind of liquidation did the historical exemption cover?

A plan calling for the corporation's entire dissolution and distribution of all assets to shareholders in return for their stock.

Citations and references

• Sales Tax General Bulletins 45-1 and 48-8, referenced but not reproduced in the official source
• Sales Tax General Bulletin dated January 16, 1945, referenced but not reproduced 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/495-0736.pdf

Original ruling text

State of California

Board of Equalization

495.0736

Memorandum
To:

Mr. W. E. Williams

From:

E. H. Stetson

Subject:

REDACTED TEXT

Date:

January 25, 1952

FACTS
The contract in question is entitled a Plan of Partial Liquidation and Distribution of the REDACTED TEXT. Briefly, facts are essentially that X corporation had several branch offices selling and servicing automobiles. Pursuant to the policy of the manufacturer of the automobiles to decentralize its dealers it was decided to create separate entities at each branch, else all branches would lose their franchise. Accordingly, this contract was entered into whereby two of the three shareholders each turned their one-third interest as shareholders over to corporation in exchange for one-third of the assets of the corporation. It appears that the corporation was not dissolved because, it was said at the hearing, the remaining stockholder would have to pay a large capital gain income tax if this were done. The issue essentially seems to be--was the transfer of the property to one of the former shareholders for his shares a taxable transaction, or exempt as one in the nature of a ratable distribution of the assets in kind upon the "liquidation" of a corporation? OPINION It is our opinion that this transaction should be regarded as taxable. This opinion is primarily based on our memo of August 14, 1951, expressed to REDACTED TEXT where we stated that the distribution of furniture and fixtures of a corporation to one of its stockholders in return for the stock held in the corporation by that stockholder which was to be retired by the corporation pursuant to its plan to reduce its stated capital, constituted a taxable transaction. (See accompanying REDACTED TEXT) Under the present set of facts, we, in addition have been shown no positive evidence that the stock turned in was retired, and, accordingly there appears to be even less reason for treating this transaction as exempt. Pursuant to the opinion, mentioned above, it appears that, in any event, we have not construed the exemptions provided for in Sales Tax General Bulletins 45- 1 and 48-8 as applicable unless the ratable distribution in kind is part of a plan calling for the entire dissolution of the corporation. This seems to be entirely correct in view of the fact that Sales Tax General Bulletin of January 16, 1945, states that the tax does not apply with respect to a transaction in which a corporation

dissolves and distributes the entire assets to its stockholders in return for the delivery of the stock of the corporation by the stockholders to the corporation. It is also my opinion that we should not unduly broaden the exemptions provided for in these bulletins, as they appear to be in the nature of implied exemptions not expressly provided for under the Sales and Use Tax Law. WWM:ja