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

Ctrl. No. 26347