Was exchanging half the stock of an S corporation for a direct 50% interest in its sole asset, an aircraft, subject to use tax?

Plain-English summary

A shareholder owned 50% of an S corporation whose sole asset was a Cessna 210 aircraft. The shareholder proposed giving the corporation that 50% stock interest in exchange for direct ownership of half the aircraft, then using the aircraft before selling the interest to an unrelated buyer.

Counsel concluded that the corporation-to-shareholder transfer was a sale. The stock had value and was consideration for the aircraft interest. Use tax applied, measured by the stock's value plus any other consideration such as assumed liabilities.

Because the aircraft was the corporation's only asset, counsel said the transferred stock would ordinarily be worth 50% of the aircraft's value. The later sale of the shareholder's aircraft interest to the third party would also be subject to use tax measured by that sale price.

What this means for you

Owners moving an asset out of a corporation

Exchanging ownership interests for corporate property was not treated as a distribution without consideration. The surrendered stock supplied the taxable value.

Accountants and tax professionals

Value the equity transferred and identify debt or other consideration. The letter's 50% aircraft-value shortcut depended on the corporation having no other assets.

Common questions

Q: What aircraft did the corporation own?

A: A Cessna 210.

Q: Why was the transfer a sale?

A: The shareholder surrendered valuable stock in exchange for the aircraft interest.

Q: How was use tax measured?

A: By the stock's value plus any other consideration; absent contrary facts, the stock equaled 50% of the aircraft's value.

Q: Was the planned resale to a third party also taxable?

A: Yes. Counsel said use tax would apply to that sale price as well.

Citations and references

• California Revenue and Taxation Code §§ 6014, 6015, 6051, 6201, 6275, 6282, and 6401

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 585.0278
• Original supporting opinion: 585.0278 PDF

Original ruling text

585.0278

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE (916) 323-3787
FAX (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego

October 21, 1996

BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento
___
E. L. SORENSEN, JR.
Executive Director

Mr. R--- J. B--B--- & P--Certified Public Accountants
XXXX --- Avenue, Suite XXX
--- ---, CA XXXXX
Re:

Unidentified Taxpayer

Dear Mr. B---:
This is in response to your letter dated August 23, 1996 requesting an opinion on the application of sales or use tax to your client’s transfer of a 50% ownership interest in a Sub-chapter S corporation in exchange for a 50% interest in the Sub-chapter S corporation’s sole asset, an aircraft. You state that your client owns 50% of the outstanding stock of a Sub-chapter S corporation (“Corporation”). The Corporation’s sole asset is a Cessna 210 aircraft. We assume that the Corporation is not in the business of selling aircraft. Your client wishes to exchange his 50% stock ownership in the Corporation for a 50% direct interest in the aircraft. The aircraft would then be re-registered showing your client as a co-owner of the aircraft along with the Corporation. You further state that the reason your client desires the transfer is to facilitate the subsequent resale of his 50% interest in the aircraft to a third party, who has no interest in investing in the Corporation. We assume that your client will use the aircraft prior to selling his 50% interest in the aircraft to the third party. Any person who makes a retail sale of an aircraft is a retailer. (Rev. & Tax. Code § 6275; see also Rev. & Tax. Code §§ 6014, 6015.) Retail sales are subject to either sales or use tax unless exempt. (Rev. & Tax. Code §§ 6051, 6201, 6401.) In this case, use tax applies. (See Rev. & Tax. Code § 6282.) Your client’s sale of the 50% ownership interest in the aircraft to a third party will be subject to use tax, measured by the sale price. The question you present is whether the transfer from the corporation to your client is a sale, and if so, whether it is also subject to tax. Whether there is a sale of tangible personal property depends on whether there is consideration for the 50% interest in the aircraft. Fifty percent stock ownership in the Corporation is something of value at the time of the transfer, and constitutes consideration. Thus, there is a sale and tax applies. The sale price is the value of that consideration and any other form of consideration

Mr. R--- J. B---

-2-

October 21, 1996
585.0278

(e.g. assumption of liabilities). The use tax is measured by the value of the stock that will be transferred. Unless the circumstances indicate otherwise, since the Corporation’s sole asset is the aircraft, the value of the shares transferred would be equivalent to 50% of the value of the aircraft. Thus, use tax would be measured by 50% of the value of the aircraft. This opinion is based on the facts stated in your letter and the assumptions made above. If our assumptions are incorrect, for example if the Corporation is required to hold a seller’s permit by virtue of sales of aircraft, this opinion does not apply. If such is the case and you wish an opinion applicable to the actual facts of the transaction, please write again and describe the transaction with specificity. Yours very truly,

Charlotte Chyr
Tax Counsel
CC:cl

cc:

Van Nuys District Administrator