Is a company's transfer of an entire manufacturing division's assets into new subsidiaries exempt from Connecticut sales and use tax as a casual sale?

Plain-English summary

A large manufacturing corporation planned to spin a division off into new subsidiaries. To do it, the parent would contribute all of the division's assets and liabilities — inventory (raw materials, work in progress, finished goods), manufacturing materials, tools and fuel, machinery, and miscellaneous property used in manufacturing, sales, and administration — to the new subsidiaries, which would then carry on the division's businesses. The deal was structured so no gain or loss would be recognized for federal income tax purposes. DRS was asked whether that transfer escaped Connecticut sales and use tax as a casual sale.

DRS first noted that although the parent called it a "contribution," it would assume the transfer is a "sale" (a transfer of title for consideration, § 12-407(2)(a)) for purposes of the ruling. It then applied the casual (isolated) sale exemption in Conn. Agencies Regs. § 12-426-17, which covers sales "not sufficient in number, scope and character to constitute an activity requiring a seller's permit." Two of the regulation's examples fit:

• § 12-426-17(c)(2) — "sale of a business in its entirety by the owner." The parent is transferring the entire division's businesses to the subsidiaries to continue operating, which squarely fits.
• § 12-426-17(c)(5) — used machinery/equipment sold by an owner "engaged in a business or occupation, such as manufacturing … but who is not engaged in the selling of such items as a business." An alternative basis.

Motor vehicles and vessels get separate treatment. The casual-sale rule usually doesn't cover them, but § 12-426-17(c)(7) and, more directly, Conn. Gen. Stat. § 12-431(a) make a vehicle/vessel transfer nontaxable in a business organization/reorganization when (a) the last taxable transfer was taxed, (b) the transferee is the incorporated business or a shareholder, and (c) no gain or loss is recognized federally. All three conditions were met here.

The exceptions: airplanes and snowmobiles don't qualify under either the casual-sale regulation or § 12-431(a). So DRS ruled the transfer of the division's assets except airplanes and snowmobiles is exempt. (This Ruling is later cited in Ruling 96-8.)

What this means for you

Companies reorganizing or spinning off a business

Transferring an entire business or division — with its assets — to a new entity in a reorganization can be an exempt casual sale in Connecticut, rather than a taxable sale of each asset. The key is that you're moving the business in its entirety and you're not in the business of selling those assets.

Don't forget the vehicle and vessel conditions

Motor vehicles and vessels are handled by a separate rule (§ 12-431(a)). To move them tax-free in a reorganization, be sure the prior transfer was taxed, the transferee is the incorporated business (or a shareholder), and the deal is a no-gain/no-loss transaction for federal income tax. Miss a condition and the vehicle transfer can be taxable.

Airplanes and snowmobiles are carved out

The casual-sale exemption and § 12-431(a) don't reach airplanes or snowmobiles. If your reorganization moves either, expect that piece to be taxable and plan for it.

Common questions

Q: Is transferring a whole division's assets to a new subsidiary taxable in Connecticut?
A: Generally no — DRS treated it as an exempt casual sale (sale of a business in its entirety, and alternatively used machinery sold by a non-dealer). But airplanes and snowmobiles are excepted and would be taxable.

Q: What about the motor vehicles and vessels in the transfer?
A: They're nontaxable under Conn. Gen. Stat. § 12-431(a) if tax was paid on their last taxable transfer, the transferee is the incorporated business or a shareholder, and no gain or loss is recognized federally.

Q: Why are airplanes and snowmobiles treated differently?
A: Neither the casual-sale regulation nor § 12-431(a) exempts them. So their transfer doesn't get the benefit and can be taxable.

Q: Does calling it a "contribution" instead of a "sale" matter?
A: DRS assumed it was a "sale" for the ruling and applied the casual-sale exemption anyway. The exemption analysis, not the label, controlled.

Citations and references

Statutes and regulations:

• Conn. Gen. Stat. § 12-407(2)(a) (definition of "sale")
• Conn. Agencies Regs. § 12-426-17 (casual/isolated sale exemption); -17(c)(2) (business sold in its entirety); -17(c)(5) (used machinery/equipment by a non-dealer); -17(c)(7) (motor vehicles in a reorganization)
• Conn. Gen. Stat. § 12-431(a) (no use tax on a motor vehicle/vessel transferred in a business organization/reorganization/liquidation, subject to conditions)

Related guidance (described in prose, not linked):

• Ruling No. 96-8 (cites this Ruling)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 94-11

Original ruling text

Ruling 94-11, Sales and Use Taxes / Casual Sales

This Ruling is cited in  Ruling 96-8

FACTS:

A large manufacturing corporation (the "Company") proposes to convert one of its manufacturing divisions (the "Division") into one or more new corporate subsidiaries of the Company (the "Subsidiaries"). The stated purpose of this restructuring is to allow direct investment in the Subsidiaries separate from the Company, which is engaged in many other enterprises in addition to the businesses of the Division.

To accomplish this conversion, the Company will contribute the assets and liabilities of the Division to the Subsidiaries. Thereafter, the Subsidiaries will continue the businesses previously conducted by the Division. This transfer will be structured so that no gain or loss will be recognized to the Company for federal income tax purposes. A substantial portion of the assets to be transferred will consist of inventory, including raw materials, work in progress and finished goods; materials, tools and fuel used in manufacturing and fabrication; and machinery used in manufacturing. Any motor vehicles or vessels transferred will have been subjected to tax on the last taxable transfer of such motor vehicles or vessels. Other assets to be transferred include miscellaneous tangible personal property used in manufacturing, in sales and in the general and administrative functions of the Division.

ISSUE:

Whether the transfer by the Company of the assets of the Division to the Subsidiaries will be exempt from sales and use taxes as a casual sale under the provisions of Conn. Agencies Regs. §12-426-17.

DISCUSSION:

Conn. Gen. Stat. §12-407(2)(a) defines "sale" and "selling" to include "[any transfer of title, exchange or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration ..."

Although the Company has stated only that it will "contribute" or "transfer" the assets of the Division to the Subsidiaries, and has not provided information which clearly establishes that such transfer is a "sale," as that term is defined in Conn. Gen. Stat. §12-407(2), it will be assumed for purposes of this Ruling that the transfer will be a sale.

Conn. Agencies Regs. §12-426-17 provides an exemption from sales and use taxes for casual or isolated sales, which are described in subsection (a) of the regulation as "certain sales which are not sufficient in number, scope and character to constitute an activity requiring a seller's permit ..." Subsection (b) of the regulation further describes casual sales as "[sales of articles of tangible personal property acquired for use or consumption by a seller and not sold in the regular course of business engaged in by such seller." Subsection (c) of the regulation provides examples of exempt sales, including "(2) [sale of a business in its entirety by the owner," and "(5) [sales of used machinery, fixtures, equipment and like items, by an owner who is engaged in a business or occupation, such as manufacturing or farming, but who is not engaged in the selling of such items as a business ..."

The items to be sold to the Subsidiaries are in connection with the "sale of a business in its entirety by the owner." The Company states that "the assets and the liabilities" of the Division (which apparently means the entirety of the Division's businesses) are to be transferred to the Subsidiaries, so that the Subsidiaries can continue to conduct the businesses of the Division. This is clearly within the meaning of a casual sale as described in Conn. Agencies Regs. §12-426-17(c)(2). Alternatively, the items being sold are "used machinery, fixtures, equipment and like items," as described in §12-426-17(c)(5).

Sales of vessels, airplanes, snowmobiles and motor vehicles do not qualify for the casual sale exemption, except for transfers "of motor vehicles upon which the transferor has paid the tax, in connection with the organization, reorganization, dissolution or partial liquidation of a business entity where no gain or loss is recognized for income tax purposes." Conn. Agencies Regs. §12-426-17(c)(7). In addition, however, with respect to the transfer by the Company of motor vehicles or vessels, Conn. Gen. Stat. §12-431(a) provides that

no use tax shall be payable in cases of transfer or purchase ... (2) when a motor vehicle or vessel is transferred or sold in connection with the organization, reorganization or liquidation of an incorporated business, provided (A) the last taxable sale, transfer or use of the motor vehicle or vessel was subjected to a tax imposed by this chapter, the transferee is the incorporated business or a stockholder thereof and (C) any gain or loss to the transferor is not recognized for federal income tax purposes ...

The facts indicate that the Company will be transferring any motor vehicles or vessels in connection with the organization of incorporated businesses, that the transferees will be incorporated businesses, that tax was paid on the last taxable transfer of such motor vehicles or vessels, and that the Company does not intend to recognize any gain or loss for federal income tax purposes. It appears that any transfers of motor vehicles or vessels by the Company will be nontaxable under this statutory provision. Any transfers of snowmobiles or airplanes by the Company would not be nontaxable either under the casual sale provisions of Conn. Agencies Regs. §12-426-17 or under Conn. Gen. Stat. §12-431(a).

RULING:

The transfer by the Company of the assets of the Division (except airplanes and snowmobiles) to the Subsidiaries will be exempt from sales and use taxes as a casual sale under the provisions of Conn. Agencies Regs. §12-426-17.

LEGAL DIVISION

June 23, 1994