Was the transfer of furniture, fixtures, equipment, and other assets from two wholly owned affiliated LLCs to their surviving parent in a merger exempt from Rhode Island sales and use tax as a casual sale?

Plain-English summary

The asset transfers from the two affiliated LLCs to the surviving parent LLC in the merger were exempt from Rhode Island sales and use tax as a casual sale. The transaction satisfied each condition in the business-reorganization exception.

Before the merger, one LLC owned the land, building, and some furniture, fixtures, and equipment, while the operating LLC owned most of the furniture, fixtures, and equipment and ran the business. The Delaware parent owned 100% of both Rhode Island LLCs. On September 30, 2010, the two subsidiaries merged into the parent, which survived, received their assets, and continued the business.

Rhode Island's casual-sale rule exempted a transfer connected with the organization, reorganization, dissolution, or partial liquidation of a business entity when three conditions were met. First, the assets' last taxable sale, transfer, or use had been subjected to Rhode Island sales or use tax. Second, the transferee had the required relationship to the business entity. Third, the transferor recognized no gain or loss for federal income-tax purposes.

The ruling found all three conditions satisfied. Tax due on the original asset acquisitions had been paid; the surviving parent was the affiliated business entity and owner; and the merger was described as tax-free under IRC § 731. The asset transfer therefore was not taxable.

What this means for you

Affiliated business groups

Common ownership alone was not the entire test. The exemption depended on a qualifying reorganization, prior tax on the assets, the transferee's statutory relationship, and federal nonrecognition.

Merger and restructuring teams

Document the chain of asset acquisitions, proof that applicable Rhode Island tax was paid, ownership before the transaction, the legal merger, and the federal income-tax treatment.

Accountants and tax advisers

Apply the exception asset by asset and transaction by transaction. This ruling covered the assets and merger facts presented; it did not create a general exemption for every transfer within an affiliated group.

Common questions

Was the merger asset transfer taxable? No. It qualified as an exempt casual sale under R.I. Gen. Laws § 44-18-20(d)(2).

Did prior payment of sales or use tax matter? Yes. The last taxable sale, transfer, or use of the assets had to have been subjected to tax.

Did the transferee have to be related to the reorganized business? Yes. The ruling found the surviving parent and owner satisfied the required relationship.

Did federal tax treatment matter? Yes. Gain or loss to the transferors could not be recognized under federal income-tax law; the ruling described the merger as tax-free under IRC § 731.

Would every intercompany asset transfer qualify? No. The holding depended on satisfying all statutory casual-sale conditions in the described merger.

Citations and references

• R.I. Gen. Laws § 44-18-20(d)(2) — casual-sale exemption for qualifying business reorganizations.
• R.I. Gen. Laws § 44-18-21 — use-tax provisions referenced in the casual-sale rule.
• 26 U.S.C. § 731 — federal nonrecognition provision identified in the merger facts.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 2010-01

Original ruling text

Ruling Request No. 2010-01

Ruling Request No. 2010-01

Request for Ruling Regarding Applicability of “Casual Sales” Treatment Under RIGL §44-18-20(d)(2) when Assets are Transferred Among Corporations in an Affiliated Group

Facts

The facts set forth in your request of ruling dated October 12, 2010

On September 30, 2010, ABC, LLC (“ABC”) and ABC Operating Company, LLC, (“ABCOC”), each of which are Rhode Island limited liability companies, merged into XYZ, LLC, (“XYZ”) a Delaware limited liability Company that is qualified to do business in Rhode Island. Following the merger, XYZ was the surviving entity. The Employer Identification Numbers for ABC, ABCOC and XYZ, respectively, are 11-1111111, 22-2222222 and 33-3333333.

At the time of the merger XYZ directly owned 100% of the membership interest in ABC and ABCOC. For federal and state income tax purposes the merger of ABC and ABCOC into XYZ will be tax free under the provisions of Section 731 of the Internal Revenue Code of 1986, as amended the (“Code”).

Prior to the merger ABC owned the land and building which constitutes the business in downtown City and a portion of the furniture, fixtures and equipment used at the business and ABCOC owned the vast majority of the furniture, fixtures and equipment used at the business and operated the business. Any Rhode Island sales and use tax due on the initial acquisition of the assets held by ABC and ABCOC at the time of the merger were paid when those assets were acquired. Following the merger all of the assets owned by ABC and ABCOC were transferred to XYZ and it will operate the business.

In this case the previous taxable transfers or sales of the assets that were transferred pursuant to the merger had been subject to sales and use tax, the transferee is a member of each of the transferors and any gain on these transfers pursuant to the merger will not be recognized for federal income tax purposes under Section 731 of the Code.

Ruling Requested

Whether the transfer of the assets held by ABC and ABCPOC to XYZ pursuant to the merger should not be subject to Rhode Island sales and use tax and should be treated as a “casual sale” under Section 44-18-20(d)(2), Rhode Island General Laws, which is exempt from tax.

Discussion

RIGL §44-18-20(d) provides in part: Notwithstanding the provisions contained in this section and in § 44-18-21 relating to the imposition of a use tax and liability for this tax on certain casual sales, no tax is payable in any casual sale:

(1) When the transferee or purchaser is the spouse, mother, father, brother, sister, or child of the transferor or seller:

(2) When the transfer or sale is made in connection with the organization, reorganization, dissolution, or partial liquidation of a business entity; provided:

(i) The last taxable sale, transfer, or use of the article being transferred or sold was subjected to a tax imposed by this chapter;

(ii) The transferee is the business entity referred to or is a stockholder, owner, member, or partner; and

(iii) Any gain or loss to the transferor is not recognized for income tax purposes under the provisions of the federal income tax law and treasury regulations and rulings issued thereunder.

Ruling

Based on the facts presented, the transfer of assets was made in connection with the reorganization of a business entity, the last taxable sale, transfer, or use of the assets being transferred were subjected to tax imposed under Title 44 Chapter 18 of the Rhode Island General Laws, the transferee is the business referred to and the gain or loss to the transferor is not recognized for income tax purposes under the provisions of the federal income tax law and treasury regulations and rulings.

Accordingly, transfer of the assets held by ABC and ABCOC to XYZ pursuant to the merger is not be subject to Rhode Island sales and use tax and should be treated as a “casual sale” under Section 44-18-20(d)(2), Rhode Island General Laws, which is exempt from tax.

This ruling may be relied upon by the company and shall be valid until expressly revoked or until the applicable statutory provisions of law are amended in a manner that requires a different result or the underlying facts described herein change.

**David M. Sullivan

Tax Administrator

December 6, 2010**