Was a hospital's contribution of operating property to a new wholly owned subsidiary taxable when the subsidiary issued stock and assumed debt above 80% of value?

Plain-English summary

The hospital's transfer of tangible personal property to its newly formed wholly owned subsidiary was an exempt isolated sale. The subsidiary issued its stock as part of its initial capital formation and assumed debt exceeding 80% of the property's fair market value.

The property was used in hospital operations rather than held for sale, and no motor vehicles were included. After formation, the hospital planned to sell the subsidiary's stock to another corporation.

Florida's rule treated a proportional contribution of property to an entity in exchange for an ownership interest as an isolated transaction. On these facts, the large debt assumption did not make the property transfer taxable.

What this means for you

Corporate formation or restructuring can qualify as an isolated sale even when liabilities move with the assets, but the exception is limited. The ruling expressly identified inventory, motor vehicles, and obsolete property as outside the cited exemption.

The transfer also had to fit the capital-contribution structure described in the rule, not an ordinary recurring sale of business assets.

Common questions

Q: Did the subsidiary assume debt? Yes, more than 80% of the transferred property's fair market value.

Q: Did that debt make the transfer taxable? No, not under the isolated-sale conclusion on these facts.

Q: Was inventory transferred? No. The property was not held for sale.

Q: Were motor vehicles included? No.

Q: Does the cited exemption cover every corporate asset transfer? No. The ruling emphasized the qualifying capital contribution and exclusions for inventory, motor vehicles, and obsolete property.

Citations and references

• Fla. Stat. § 212.02(2) — business excludes qualifying occasional or isolated sales
• Fla. Stat. § 212.05 — tax on the business of retail selling
• Fla. Admin. Code r. 12A-1.037(2) — exempt isolated transfers and capital contributions between entities
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-050

Original ruling text

SUMMARY

The transfer of items of tangible personal property from a parent corporation to a wholly owned subsidiary corporation is an isolated sale and not subject to taxation if the subsidiary corporation assumes debt exceeding 80% of the fair market value of the property being transferred.

Florida law states that occasional or isolated sales of tangible personal property are not subject to Florida sales or use tax. Sections 212.02(2), F.S., and 212.05, F.S. In conformity with this legislative directive, the Department has determined that certain transfers of tangible personal property from one corporation to another corporation are exempt from taxation as isolated sales. Rule 12-1.037(2), F.A.C. This exemption does not apply to transfers of inventory, motor vehicles, or obsolete property. See Rule 12A-1.037(2)(a)1., 2., and 3., F.A.C.

Aug 01, 1997

Re: Technical Assistance Advisement 97A-050 XXX ("Corporation") Occasional/Isolated Sale Rule 12A-1.037(2), F.A.C.

Dear :

This response is in reply to your letter dated March 26, 1996, requesting the Department's issuance of a Technical Assistance Advisement ("TAA") pursuant to s. 213.22, F.S., and Chapter 12-11, F.A.C., regarding the referenced matter and parties. An examination of your petition has established that you have complied with the statutory and regulatory requirements for issuance of a TAA. Therefore, the Department is hereby granting your request for issuance of a TAA.

FACTS

The following facts have been provided to the Department:

As part of the disposition of certain hospital operations of XXX ("the Hospital") to [Corporation], [Hospital] will be required to establish a wholly owned subsidiary corporation [Subsidiary Corporation]. Items of tangible personal property owned by [Hospital] will be transferred to the wholly owned subsidiary corporation as part of the initial capital formation of the subsidiary. The items of tangible personal property being transferred are items which are not held for sale by [Hospital]. Motor vehicles are not included. At the time of the transfer of ownership of the items of tangible personal property to the subsidiary they will be subject to a debt which will be assumed by the subsidiary corporation which represents in excess of 80% of the fair market value of the tangible personal property being transferred. Subsequent to the formation of the subsidiary stock in the subsidiary will be sold by the Hospital to [Corporation].

ISSUES

Whether the transfer of items of tangible personal property from a parent corporation to a wholly owned subsidiary corporation is subject to sales and use tax if the subsidiary corporation assumes debt exceeding 80% of the fair market value of the property being transferred.

APPLICABLE LAW

Section 212.02(2), F.S., provides in part:

"Business" means any activity engaged in by any person, or caused to be engaged in by him or her, with the object of private or public gain, benefit, or advantage, either direct or indirect. Except for the sales of any aircraft, boat, mobile home, or motor vehicle, the term "business" shall not be construed in this chapter to include occasional or isolated sales or transactions involving tangible personal property or services by a person who does

not hold himself or herself out as engaged in business,....

Section 212.05, F.S., provides in part:

Sales, storage, use tax.-- It is hereby declared to be the legislative intent that every person is exercising a taxable privilege who engages in the business of selling tangible personal property at retail in this state, including the business of making mail order sales, or who rents or furnishes any of the things or services taxable under this chapter, or who stores for use or consumption in this state any item or article of tangible personal property as defined herein and who leases or rents such property within the state.

Rule 12A-1.037, F.A.C., provides in part:

(2) An exempt isolated sale or transaction occurs when an entity, which for purposes of this rule is a "person", as defined in s. 212.02[(12)], F.S., required to be registered as a dealer, either distributes tangible personal property in exchange for the surrender of a proportionate interest in an entity, or transfers all, or substantially all, of the property of a person's business, or a division thereof. Also, the transfer of property to an entity in exchange for an interest therein in proportion to the tangible personal property contributed is exempt as an isolated sale....

(b) A transfer, distribution, exchange or sale of tangible personal property to or by an entity is an exempt isolated sale when:... 1.b. Example: X Corp transfers all or substantially all of the tangible personal property of one of its divisions to Y Corp, a newly formed corporation, in exchange for all of the stock of Y Corp. The transfer of the tangible personal property is a contribution to the capital of Y Corp and therefore is an exempt isolated sale.

DISCUSSION

Florida law states that occasional or isolated sales of tangible

personal property are not subject to Florida sales or use tax. ss. 212.02(2), F.S., and 212.05, F.S. In conformity with this legislative directive, the Department has determined that certain transfers of tangible personal property from one corporation to another corporation are exempt from taxation as isolated sales. Rule 12A-1.037(2), F.A.C. This exemption does not apply to transfers of inventory, motor vehicles, or obsolete property. See Rule 12A-1.037(2)(a)1., 2., and 3., F.A.C.

Subsidiary Corporation plans to exchange its stock for some of the Hospital's tangible personal property. Subsidiary Corporation will assume the debt for the property it receives from Hospital. The debt to be assumed exceeds 80% of the fair market value of the tangible personal property being transferred to the Subsidiary Corporation. Then the Hospital plans to sell some of its Subsidiary Corporation stock to the Corporation. Based on these facts, the transfer of tangible personal property to Subsidiary Corporation is an isolated sale and is not subject to taxation.

This response constitutes a Technical Assistance Advisement under s. 213.22, F.S., which is binding on the Department only under the facts and circumstances described in the request for this advice as specified in s. 213.22, F.S. Our response is predicated on those facts and the specific situation summarized above. You are advised that subsequent statutory or administrative rule changes or judicial interpretations of the statutes or rules upon which this advice is based may subject similar future transactions to a different treatment than expressed in this response.

You are further advised that this response and your request are public records under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of s. 213.22, F.S. Your name, address, and any other details which might lead to identification of the taxpayer must be deleted by the Department before disclosure. In an effort to protect confidential information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or this response.

Sincerely,

Vicki Allen
Tax Law Specialist
Technical Assistance and Dispute
Resolution
(850) 922-4846

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