Did an offshore purchase followed immediately by a father-son vessel transfer and return to California avoid sales and use tax?

Plain-English summary

A taxpayer bought a documented vessel located in Long Beach under a bill of sale providing for title to pass outside California waters. Immediately after that offshore delivery, he transferred the vessel to his father outside California, and the vessel immediately returned to California.

The taxpayer claimed the first sale occurred outside California, that he did not buy the vessel for California use, and that the father-son transfer qualified for the family exemption.

Staff viewed the mid-ocean purchase and immediate resale as a sham designed to defeat the applicable tax. Because the record did not show with certainty which party was the real purchaser and owner, counsel recommended determinations against both the first purchaser and the father.

Actual ownership would control at hearing. If the first purchaser paid property tax, slip rent, or upkeep, the father could be treated as a straw registered owner. If the father bore those expenses and truly owned the vessel, the first purchaser could be treated as a straw man or purchasing agent for the father.

What this means for you

Families transferring a vessel offshore

Formal title steps did not control when the sequence lacked independent substance. California looked to who actually bought, maintained, and benefited from the vessel.

Accountants and tax professionals

Trace purchase funds, title, property tax, slip rent, insurance, repairs, upkeep, possession, and use. Protective assessments may reach multiple parties while beneficial ownership remains uncertain.

Common questions

Q: Where was the vessel before the transaction?

A: Long Beach, California.

Q: What happened after offshore delivery?

A: The buyer immediately transferred the vessel to his father, and the vessel immediately re-entered California waters.

Q: Why did staff recommend assessments against both parties?

A: The facts did not establish which person was the true purchaser and owner.

Q: What evidence would identify the actual owner?

A: Evidence showing who paid property taxes, slip rental, upkeep, and other ownership costs.

Citations and references

• California Revenue and Taxation Code § 6285(a)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 585.0198
• Original supporting opinion: 585.0198 PDF

Original ruling text

State of California

Board of Equalization
Legal Division (MIC:82)

585.0198

Memorandum
To

:

Mr. Geoffrey E. Lyle
Supervising Tax Auditor
Petition Section (MIC:38)

From

:

Thomas J. Cooke
Staff Counsel

Subject :

Date:

July 21, 1995

[H]
Account No. S- -- XX-XXXXXX-010

This office has received your memorandum dated May 1, 1995, to which you attached a petition for redetermination filed on behalf of the above taxpayer. On April 16, 1993, in response to a memorandum from Robert McCanne of the Consumer Use Tax Section, the Legal Section issued an opinion that use tax was applicable on the purchase of a documented vessel by [H]. Based on this opinion, the Consumer Use Tax Division issued a Notice of Determination to [H on January 24, 1995. In the attached petition for redetermination, the taxpayer’s representative has stated reasons for disagreeing with the Legal Division’s memorandum. You request that the Legal Division respond to the arguments stated in the petition for redetermination. The taxpayer purchased a documented vessel which was physically located in Long Beach, California. The bill of sale provided that title to the vessel would transfer to the purchaser upon delivery “outside the territorial waters of the state.” Immediately after delivery of the vessel to the taxpayer in international waters, the taxpayer sold the vessel to his father,
[H2] “outside the territorial waters of the state.” The vessel immediately re-entered “the territorial waters of the state.” The taxpayer claims that no sales or use tax applies to his purchase of the vessel because the sale occurred outside the state and the vessel was not purchased for his use in California. Revenue and Taxation Code Section 6285(a) states that the transfer of a vessel between enumerated family members is exempt from sales and use taxes in certain situations. It is our opinion that determinations should be issued to both the seller and the purchaser in this case. We believe that there are insufficient facts for the Board to decide with certainty whether the seller or the purchaser is responsible for the tax. The basis for issuing a determination against both the seller and the purchaser is our belief that the transaction is a “sham” and the mid-ocean purchase and sale was clearly intended to defeat the imposition of the applicable tax.

Mr. Geoffrey E. Lyle

-2-

July 21, 1995
585.0198

In any hearing in response to a petition for redetermination, if there is evidence that [H] has been paying property taxes, slip rental or upkeep on the vessel, he will be liable for the tax on the basis that [H2], as registered owner, is merely a “straw man.” On the other hand, if [H2] is really the owner because he continues to pay taxes, slip rental or upkeep, the Board should assess tax against him on the basis that the facts and circumstances of the transaction show that
[H] was merely a “straw man” or an agent to facilitate [H2]’s purchase of the vessel.

TJC/cmm
cc:

Consumer Use Tax Section (MIC:37)