Did a series of asset transfers between commonly owned affiliates qualify as an exempt occasional sale?

Plain-English summary

A company transferred two mainframe computers and 165 peripheral items to its wholly owned subsidiary as part of a reorganization. The parent owned all of the transferor, and the transferor owned all of the subsidiary, so ownership after the transfer could be substantially similar. The companies also represented that at least 80% of the transferor's property moved to the subsidiary.

The Comptroller nevertheless denied the occasional-sale exemption. Rule 3.316(e) required at least 80% of the property to be transferred in one transaction. Because the equipment moved through several transactions over several months, and no single transaction equaled 80%, the Comptroller treated the planned series as taxable transactions.

Common questions

Was common ownership enough for exemption? No.

What transaction threshold did the Comptroller apply? At least 80% of the property had to be transferred in one transaction.

Could several transfers over months be combined? No. The letter treated the planned series as taxable when no single transaction reached the threshold.

Citations and references

• 34 Tex. Admin. Code Rule 3.316(e) — transfer without change in ownership under the occasional-sales rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8603L0724G04

Original ruling text

March 19, 1986

Dear ***:

Thank you for your recent letter concerning the transfer of operational
assets from Company A to its wholly owned subsidiary, Company A of CITY.

ABC Company, the parent company of Company A, decided to reorganize
Company A and decentralize its operations through the subsidiary office.
"As a result of this decision, all services and customer support for
the CITY metropolitan area including related capital assets and personnel
were transferred from Company A to Company A of CITY."

The assets transferred from Company A to Company A of CITY consisted of
two VAX Mainframe computers and all CRT's and printers accessing these
machines through existing communication lines. Even though the paperwork
related to the transfer of assets was finalized over several months, the
value used was that of Book Value as of 10/01/84 to coincide with the
transfer of revenue, personnel, and other expenses.

The equipment transfer was handled financially by Company A of CITY in the
following manner:

1) VAX A was transferred in exchange for an existing Company A note payable
to a local bank.

2) VAX B was transferred in exchange for investment funds from ABC Company
owed to Company A of CITY.

3) The peripheral equipment (165 items) was paid for by Company A of CITY
through an existing line of credit at a local bank.

You claim that the transfer of these assets qualifies as an exempt occasional
sale under Section (e), Transfer Without Change in Ownership, Rule 3.316,
Occasional Sales.

Although ownership of the equipment may be substantially similar after the
transfer (ABC owns 100% of the stock in Company A and Company A owns 100% of
the stock in Company A of CITY) and at least 80% of the property used by
Company A was transferred to its subsidiary, these transactions do not qualify
as occasional sales.

At least 80% of the property must be transferred in one transaction in order
for that transaction to qualify as an occasional sale. If several transactions
occur "over several months" and no one transaction equals 80%, there has not
been an "occasional sale". This is a planned series of taxable transactions.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call us at
1-800-252-5555 toll free from anywhere in Texas. You may write us at the
Tax Administration Division.

Sincerely,

Tax Administration Division