Was transferring motor vehicles to a newly formed Louisiana LLC taxable when the transferor received membership interests and the LLC paid the vehicles' debt?

Plain-English summary

The transfer of motor vehicles and other assets to a newly formed Louisiana LLC was a taxable sale when the transferor received an LLC membership interest and the LLC paid the transferor's existing vehicle debt.

Louisiana treated both the equity interest and debt payment as consideration for transferring title or possession. The transaction was not for resale, so it met the retail-sale definition.

The occasional-sale exclusion could not protect the vehicles because Louisiana expressly treated isolated or occasional vehicle sales as taxable retail sales.

Why a capital contribution did not create an exemption

The ruling noted that Louisiana did not have a specific exemption for contributions to a newly formed LLC. Some nonvehicle assets in a 26 U.S.C. § 721 exchange could avoid tax through occasional-sale treatment, but motor vehicles could not.

The fact that the new LLC and transferor were related did not erase their separate-entity status absent extraordinary facts justifying disregard of the LLC.

Debt as taxable consideration

When assumed or paid debt arose directly from the transferred vehicles, the full debt amount was subject to sales or use tax.

If one pool of assumed debt related partly to taxable vehicles or other nonqualifying property and partly to assets qualifying for occasional-sale treatment, the ruling allowed allocation. The taxable fraction was the value of taxable assets divided by total transferred-asset value, multiplied by total assumed debt.

Donation label did not change the result

Even if the vehicles were described as donated, the transferee's payment of existing debt supplied consideration. The ruling therefore still treated the transfer as a sale.

Common questions

Q: Was the vehicle transfer taxable?

A: Yes.

Q: Did receiving an LLC membership interest count as consideration?

A: Yes, along with payment of the transferor's vehicle debt.

Q: Could the motor vehicles qualify as occasional sales?

A: No. La. R.S. 47:303(B)(4) excluded vehicle transfers from that protection.

Q: Could mixed debt be allocated between taxable and nontaxable assets?

A: Yes, using the value-based formula stated in the ruling.

Citations and references

• La. R.S. 47:301(10)(a)(i), (10)(c)(ii), and (12)
• La. R.S. 47:302(A), 47:303(B)(4), 47:321(A), and 47:331(A)
• La. Civ. Code arts. 1523, 1524, and 1526 — onerous donations
• 26 U.S.C. § 721 — partnership contribution discussed in the ruling
• LAC 61:I.4301.C — retail and occasional sales
• Louisiana Attorney General Opinion Nos. 1978-1539 and 1978-1539 A
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 06-002

Original ruling text

Revenue Ruling
No. 06- 002
April 7, 2006
Sales and Use Tax
Transfer of Motor Vehicles in Exchange for Payment of Indebtedness
and a Membership Interest in a Commencing Limited Liability Company
This revenue ruling clarifies the sales tax treatment of a transfer of motor vehicles in exchange
for payment of indebtedness and a membership interest in a commencing limited liability
company.
Facts
Company A, a Louisiana business, plans to reorganize by merging with other affiliated entities
into a newly created Louisiana limited liability company (LLC). The transaction will entail the
movement of vehicles currently titled in Louisiana and other assets from the pre-existing
business entities to a newly created Louisiana LLC in exchange for membership interest in the
LLC in proportion to the value of the assets transferred from the pre-existing entities. Applicable
sales or use tax was paid to the state of Louisiana on the initial purchase or use of the trucks in
Louisiana.
There will be no consideration given in the transfer of the motor vehicles from Company A other
than an equity interest in the LLC and the payment by the new LLC of the remaining balances
due on the motor vehicles. Some of the vehicles to be transferred are encumbered; the
outstanding balances will be paid off by the new LLC.
Subsequent to the transfer, the vehicles will be mortgaged to a new lender. Company A and its
affiliated entities will have no responsibility for the new mortgages. The vehicle transfer will
happen simultaneously with the creation of the new Louisiana LLC.
After the reorganization, an out-of-state company will purchase a controlling interest in the new
LLC from various Company A entities. In essence, Company A and its affiliated entities will
continue to exist as holding companies for the units they own of the new LLC. Both the new
LLC (partnership status) and Company A and its affiliated entities (S-corporations) will be
“pass-through” entities for federal and state income tax purposes. The nonresident member of the
new LLC will be a C-corporation for tax purposes, and its assets will primarily be units in the
new LLC that it purchased from the Company A entities. The transferred vehicles will remain
titled in Louisiana.
Applicable Law
Louisiana imposes a tax upon the sale at retail or use in this state of each item or article of
tangible personal property pursuant to La. Rev. Stat. Ann. § 47:302(A), § 47:321(A), and
§ 47:331(A). La. Rev. Stat. Ann. § 47:301(12) defines sale as “any transfer of title or possession,
or both, exchange, barter, conditional or otherwise, in any manner or by any means whatsoever,
of tangible personal property, for a consideration….”
Retail sale is defined by La. Rev. Stat. Ann. § 47:301(10)(a)(i) as “a sale to a consumer or to any
other person for any purpose other than for resale as tangible personal property….” The
Department clarified the term “retail sale” in its regulation LAC 61:I.4301(C) that provides that
“the intent of the law is to classify every sale made to the final user or consumer for any
imaginable purpose, other than for resale, as a retail sale or a sale at retail.” The regulation also

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provides, “For purposes of La. Rev. Stat. Ann. § 47:301(10), whether a transaction is exempt
from taxation by statute, jurisprudence, or by constitution has no bearing on classification of the
transaction.”
Paragraph (10)(c)(ii) further states that a sale at retail does not include “…an isolated or
occasional sale of tangible personal property by a person not engaged in such business.” The
regulation on occasional sales, LAC 61:I.4301(C) “Retail Sale or Sale at Retail,” states that [t]he
primary consideration in determining whether a sale meets exemption requirements is whether
the seller is in the business, or holds himself to be in the business, of selling merchandise or
tangible personal property of similar nature, and not solely upon the frequency of the
transactions.
However, La. Rev. Stat. Ann. § 47:303(B)(4) provides that “[t]he provision contained in R.S.
§ 47:301(10). . . which excludes isolated or occasional sales from the definition of a sale at retail
is not to apply to the sale of vehicles which are the subject of this subsection.” That section
further provides, “Isolated or occasional sales of vehicles are hereby defined to be sales at retail
and as such are subject to the tax.”
Historically, administrative agencies in Louisiana have considered any assumption of
indebtedness in exchange for a motor vehicle to constitute adequate consideration for the finding
of a retail sale transaction. Department of Public Safety Policy Statement No. 58 states that if the
corporation receiving the vehicle assumes an outstanding mortgage balance, the transaction will
not be considered a contribution to capital, but rather will be deemed a taxable sale. That agency
also posts in its Motor Vehicle Registration Requirements Number 24.00 “Transactions
Involving Corporations” that taxable transactions when a vehicle is transferred from one entity to
another include “the assumption of mortgage by the newly chartered corporation” and “transfer
of a vehicle from a corporation still in existence to another corporation.”
The Office of the Attorney General of the State of Louisiana addressed in two pronouncements
the sales taxability of donations of automobiles between related individuals. In La. Atty. Gen.
Op. No. 1978-1539, a father sought to have a tax-free transfer of a motor vehicle subject to a preexisting chattel mortgage to his daughter by donating the vehicle to her. The attorney general
stated that there would be no consideration as required in the state’s definition of “sale” for tax
purposes if a father merely donated a vehicle with a pre-existing chattel mortgage to his
daughter. On the contrary, the opinion went on to state that there would be consideration
necessary for a taxable sale if the receiver of the vehicle assumed the liability on any pre-existing
chattel mortgage. That portion of the opinion reads:
Only if the daughter personally assumed the debt, thereby relieving the father of his
obligation to pay it or entitling him to subrogation and right of recovery from her if he
was compelled to pay it, would there have been a taxable consideration and a sales price
equal to the debt balance thus personally assumed.
Again, the Attorney General revisited the same fact pattern in La. Atty. Gen. Op. No 1978-1539
A. Based on the same facts, the attorney general emphatically stated that a transaction
contemplated by two parties where one received title of a motor vehicle in exchange for the

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assumption or payment of an outstanding liability was a taxable sale. The Attorney General
stated his finding as to the taxability of the transaction as follows:
I cannot call this an exempted donation if the transferee assumes an existing chattel
mortgage. You and I know of many ‘sales’ of real estate for example when the only
‘consideration’ is assumption of a mortgage. Rules of ‘sale,’ rather than ‘donations’
apply to those transfers, of either ‘immovables’ or movables.
This treatment is consistent with the Louisiana Civil Code articles on onerous donations. La.
C.C. Art. 1523 defines an “onerous donation” as a donation “which is burdened with charges
imposed on the donee.” La. C.C. Art. 1524 states “[t]he onerous donation is not a real donation,
if the value of the object given does not manifestly exceed the value of the charges imposed on
the donee.” Furthermore, La. C.C. Art. 1526 explains, “the rules peculiar to donations inter vivos
do not apply to onerous and remunerative donations, except when the value of the object given
exceeds by one-half that of the charges or of the services.”
Analysis
First, this analysis does not address any theory of reverse veil-piercing to look through the LLC
status of the newly created entity. Absent extraordinary facts indicating that the LLC and
Company A are so connected that the form of the LLC should be ignored, an LLC is a separate
entity apart from the members.
Company A’s transfer of movable assets in exchange for its membership interest in the newly
created LLC and the payment by the LLC of Company A’s pre-existing indebtedness meets the
definition of sale in § 47:301(12) because the possession and/or titles to all the transferred motor
vehicles will be exchanged in consideration of Company A’s membership interest in the new
LLC and payment of outstanding balances due on the transferred motor vehicles. The definition
of retail sale is also met since the transfers are not for resale.
Many states specifically exempt from sales and use taxation contributions to commencing LLC’s
in exchange for a membership interest in the LLC. Louisiana does not have such an exemption,
but occasionally similar transactions in Louisiana are free from sales and use tax. When this
occurs, the assets exchanged for a membership interest in a 26 U.S.C. § 721 exchange qualify for
occasional sale treatment and, thus, there are no sales or use taxes due. In the case at hand,
however, the exchange cannot be deemed an occasional sale because motor vehicle sales do not
qualify as “occasional sales” pursuant to § 47:303(B)(4).
Where the assumed indebtedness arises directly from the transferred motor vehicles, the full
amount of the assumed indebtedness is subject to sales or use tax. In transactions where part of
the amount assumed is to satisfy existing liabilities for motor vehicles or other items not
qualifying as occasional sales and part of the amount assumed is attributable to assets transferred
that would qualify for occasional sale treatment, one may allocate among the taxable and
nontaxable portions by dividing the value of the taxable assets transferred by the total value of
the assets transferred and then multiplying that amount by the total indebtedness assumed.
Last, we examine the tax consequences if Company A donated the vehicles to the new LLC.
Although our facts do not include the values of the vehicles transferred and the amount due that
will be paid off by the LLC to allow us to determine if the test under La. C.C. Art. 1526 is met,
the definition of sale for tax purposes would nevertheless be applicable since there is an

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exchange of title of tangible personal property, the motor vehicles, for consideration, the
payment of pre-existing indebtedness on the motor vehicles. La. Atty. Gen. Op. No 1978-1539
and La. Atty. Gen. Op. No 1978-1539 A both dealt with donations and reached the same
conclusion.
Conclusion
A transfer of motor vehicles and other assets of a Louisiana business in exchange for both a
membership interest in a newly created LLC and the payment of pre-existing indebtedness of the
transferor by the transferee LLC is a taxable sale for the purposes of Louisiana sales and use tax.
Louisiana does not have an exemption expressly for contributions to commencing limited
liability companies like some other states. At times, contributions to capital will escape sales
taxation by qualifying as occasional sales; however, there are no occasional sales of motor
vehicles. If the motor vehicles were transferred as a donation with the transferee paying the
existing debt of the transferor, the transaction would still be a taxable sale since there is an
exchange of title of tangible personal property, the motor vehicles, for consideration, the
payment of pre-existing indebtedness on the motor vehicles.

Cynthia Bridges
Secretary
By: Leslie C. Strahan
Attorney
Policy Services Division

A Revenue Ruling is written to provide guidance to the public and to Department of Revenue employees.
It is issued under Section 61:III.101.C of the Louisiana Administrative Code to apply principles of law to a
specific set of facts. A Revenue Ruling does not have the force and effect of law and is not binding on the
public. It is a statement of the department's position and is binding on the department until superseded or
modified by a subsequent change in statute, regulation, declaratory ruling, or court decision.