Is sales tax due when a corporation completely liquidates and distributes its vehicles to shareholders in exchange for their stock?

Plain-English summary

A 30-year-old corporation with four shareholders elected to completely liquidate and dissolve under IRC § 331, with two retirement-age shareholders ("A," owning 49.7%, and "C," owning 49.9%) taking corporate motor vehicles in exchange for redeeming their stock, while the two minority shareholders ("B" and "D," who owned very minor shares) were simply cashed out. The requester asked the Commission whether transferring those vehicles to shareholders A and C as part of the complete liquidation was a taxable event for Utah sales tax.

The transfer is a taxable "sale" because it involves consideration. Utah sales tax applies to retail sales of tangible personal property (§ 59-12-103(1)(a)), and a "sale" includes any transfer of title for consideration (§ 59-12-102(10)). The Commission found that exchanging vehicles for shares of capital stock is a sale: the shares surrendered had value equal to the net value of the assets received, so the corporation "received consideration" -- the value of the stock -- even though no cash changed hands.

The business-reorganization exemption to the vehicle exclusion requires 80%+ common ownership. Utah's isolated-or-occasional-sale exemption specifically excludes vehicles required to be titled or registered (§ 59-12-104(14)) -- UNLESS the transfer happens as part of a business reorganization where the transferee's ownership is substantially the same as the transferor's, per Utah Admin. Rule R865-19-38S. The Commission concluded that a complete liquidation and winding-up of a corporation's affairs CAN itself qualify as such a "business reorganization" for this purpose. However, applying the Utah Supreme Court's decision in BJ-Titan Services v. State Tax Commission, 183 Utah Adv. Rpt. 20 (Utah 1992) -- which required at least 80% ownership continuity to treat a transfer as a non-taxable reorganization -- the Commission found neither shareholder A (49.7%) nor shareholder C (49.9%) met that 80% threshold. So even though the liquidation itself could conceptually qualify as a reorganization, the actual vehicle transfers here failed the ownership-continuity test and remained taxable.

The taxpayer's "no consideration" argument was left unresolved for the Commission to consider, but its own analysis pointed the other way. The Commission noted the Utah Supreme Court's BJ-Titan decision left open, as a fact question, whether particular liquidation exchanges might lack "consideration" altogether. But applying the facts here -- where the value of the vehicles distributed matched the value of the stock redeemed on a pro rata basis -- the Commission's own analysis treated the exchange as a sale for consideration, taxable because the 80% ownership test wasn't met.

What this means for you

Shareholders receiving corporate assets in a liquidation

Distributing titled vehicles to shareholders as part of winding up a corporation is generally a taxable sale for Utah sales tax purposes, unless the receiving shareholder owns 80% or more of the corporation's stock. Below that threshold, expect Utah sales tax to apply to the value of the vehicle received, even in a pro rata, arm's-length liquidation.

Business owners planning a corporate dissolution involving vehicles or other titled property

If you're structuring a liquidation and want reorganization treatment for a shareholder's asset distribution, check the 80% ownership continuity requirement carefully -- it applies on a per-transferee basis, so even a majority (but sub-80%) shareholder doesn't qualify, while minority shareholders under 50% clearly don't either.

Accountants and tax professionals

This early ruling shows the Commission applying BJ-Titan Services v. State Tax Commission (decided the same year) to a corporate liquidation fact pattern, treating vehicle-for-stock exchanges as sales for consideration and requiring strict 80% ownership continuity for reorganization treatment -- worth double-checking against any subsequent statutory renumbering or updated case law given how old this ruling is.

Common questions

Q: Is distributing a corporation's vehicles to its shareholders during liquidation subject to Utah sales tax?
A: Generally yes, unless the receiving shareholder owns 80% or more of the corporation's stock, in which case the transfer can qualify for business-reorganization treatment as an exempt isolated or occasional sale.

Q: Does it matter that a liquidation isn't a typical "sale" in the everyday sense?
A: No. Utah's definition of "sale" includes any transfer of title for consideration, and surrendering stock in exchange for corporate assets counts as consideration.

Q: Can a complete corporate liquidation ever qualify as a tax-exempt business reorganization?
A: Potentially yes for the liquidation as a whole, but each individual asset transfer to a shareholder still must independently satisfy the 80%-ownership-continuity test to escape tax.

Q: Does this ruling apply to my corporation's liquidation?
A: No. It binds the Commission only for the requesting taxpayer and the facts described, and can't be relied on by another taxpayer, though it illustrates how the Commission analyzes vehicle transfers in a liquidation.

Citations and references

Statutes and rules:

• § 59-12-103(1)(a) (state sales tax on retail sales of tangible personal property)
• § 59-12-102(10) (definition of "sale")
• § 59-12-104(14) (isolated or occasional sale exemption; vehicle exclusion)
• Utah Admin. Rule R865-19-38S (business reorganization exception to the vehicle exclusion)

Case law:

• BJ-Titan Services v. State Tax Commission, 183 Utah Adv. Rpt. 20 (Utah 1992) (80% ownership continuity required for reorganization treatment; consideration is a fact question)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/92-015.pdf

Original ruling text

Response June 19, 1992

June 19, 1992

XXXXX

Re: Advisory Opinion -
Corporate Liquidation

Dear XXXXX:

This letter is in response to your recent request for a Tax Commission
ruling on whether sales tax is due on the transfer of vehicles to shareholders
after a complete liquidation of corporate assets.

The Tax Commission policy is to refer such requests to the division
most qualified to analyze the request and make recommendations concerning
it. As such, your request was referred
to the Tax Commission's Auditing Division for their analysis and
recommendations. The division's
recommendations are as follows:

1. A complete liquidation of
   all corporate assets and discontinuation of business activities does qualify as
   a business reorganization for the purpose of satisfying Sales Tax Rule
   R865-19-38S.

2. A sale as defined in
   59-12-102(10) does take place in the transfer of a vehicle from a corporation
   to a shareholder in exchange for shares of capital stock. The shares of stock had value equal to the
   net value of the assets. The corporation
   does receive "consideration" which is the value of the shares.

3. The transfer of vehicles to
   shareholder "A" who was a 49.7% owner and to shareholder
   "C" who was a 49.9% owner is taxable because neither shareholder
   owned 80% or more of the shares of stock.

For the Commission

Joe B. Pacheco

Commissioner

Utah State Tax Commission

Heber M. Wells Building

Salt Lake City, Utah 84114

Attn: XXXXX

Dear Members of the Commission:

I am writing to you to seek an advisory opinion regarding the sales tax
liability due on distribution of vehicles owned by a corporation to its
shareholders incident to a complete dissolution and secession of its affairs.

FACTS

We have a client which has been a corporation of over 30 years. It is owned by four shareholders with the
following shares:

Shareholder "A"
XXXXX

Shareholder "B"
XXXXX

Shareholder "C"
XXXXX

Shareholder "D"
XXXXX

The corporation has been winding down for a number of years as
Shareholder "A" and "C" were approaching retirement
age. On XXXXX, 1991, they elected to
cease actively entirely and liquidate the corporation under Section 331 of the
Internal Revenue Code. A copy of the
plan of liquidation is enclosed herewith.

Pursuant to the plan of liquidation, all assets were required to be
distributed to the shareholders within 30 days of XXXXX, 1992. There are several motor vehicles owned by
the corporation, which pursuant to the plan of liquidation are to be
distributed to the shareholders. Since
Shareholder "B" and "D" own very minor shares, their shares
are being redeemed by cash.
Shareholders "A" and "C" are being redeemed in
exchange for the assets owned by the corporation.

ISSUE

The issue upon which an advisory opinion is sought is whether the
transfer of the vehicles by the corporation to its shareholders as part of a
complete liquidation of the corporation is a taxable event for sales tax
purposes?

LEGAL ANALYSIS

Sales tax is imposed by Section 59-12-103(1)(a) U.C.A., on retail sales
of tangible personal property made within the state. A sale includes any transfer of title, but it must be for "a
consideration." Section
59-12-102(10) U.C.A. Certain sales are
exempt, including "isolated or occasional sales by persons not regularly
engaged in business, except the sale of vehicles or vessels required to be
titled or registered under the laws of this State." Section 59-12-104(14) U.C.A. The Commission, by rule, has continued the
pre-1987 provisions of the sales tax code dealing with business reorganizations
by providing as follows:

C. Sales of vehicles required
to be titled or registered under the laws of this state are not isolated or
occasional sales, except that any transfer of a vehicle in a business
reorganization where the ownership of the transferee organization is substantially
the same as the ownership of the transferor organization shall be considered an
isolated or occasional sale.

Finally, the Utah Supreme Court in a recent case, addressed the
predecessor statute on some of these issues.
In BJ-Titan Services v. State Tax Commission, 183 Utah Adv. Rpt. 20
(Utah 1992), the Utah Supreme Court addressed the issues of both consideration
and reorganization. The taxpayer was
unsuccessful in asserting reorganization treatment. The Court found that a venture between two entities forming a new
general partnership was not a continuation of the old organizations, since 80%
of the ownership was not retained by the corporation which previously owned the
vehicles in question. The Court cited
with approval, however, 19 Am. Jur. 2d Corporation � 2514, finding that the
general rule for a reorganization ". . . is not ordinarily the combination
of several existing corporations, but is simply the carrying out by proper
agreement and legal proceedings of a business plan for winding up the affairs
of . . . [a corporation] XXXXX, at 26.

The Court further addressed three cases raised by the taxpayer in
footnote 7. The cases cited by the
taxpayer, dealt with the threshold issue of consideration under the definition
of a retail sale. The Court
observed: "These cases necessarily
turn on a question of fact: was there
consideration for the transfer of assets?
To make this determination, the terms and circumstances of the
transaction must be examined. Because
this argument was not presented to the Commission below, a finding of fact on
consideration has not been made, and we will not indulge in such evidentiary
endeavors." Supra, at 26.

Argument

There are two basis that the taxpayer can assert non-taxability of the
above transaction:

1. A complete liquidation of
   the corporation under Section 331 of the Internal Revenue Code is a business
   reorganization under Rule 865-19-38S since the shareholders who previously
   owned the bulk of the stock of the corporation are the same who are receiving
   the assets in the complete liquidation of the corporation.

2. As observed by the Utah
   Supreme Court in XXXXX, supra, the exchange of stock in a complete liquidation
   of corporation may not be for consideration as required by the definition of a
   sale found in � 59-12-102(10), U.C.A.

I appreciate your expeditious handling of this request for advisory
opinion since the Internal Revenue Code Requires the liquidation to be
completed within 30 days of XXXXX, 1992.
Thank you for your assistance regarding this request.

Sincerely,

XXXXX

[Certified Copy of Plan of Liquidation of
XXXXX, a Utah Corporation]

I hereby certify that the following Plan of Liquidation was unanimously
adopted at a special meeting of the shareholder of XXXXX, held on the XXXXX day
of XXXXX, 1992:

1. Within 30 days after the
   date of the meeting at which the shareholders adopt a plan of liquidation, the
   corporate officers shall file Form 966 with the District Director of Internal
   Revenue, Salt Lake City, Utah, together with a certified copy of this plan of
   liquidation.

2. The Corporation shall make
   distribution to its shareholders of all assets of the Corporation after
   proceeding as far as possible to collection any account receivable and to pay
   any debts associated with said assets.

3. After distribution of all
   assets subject to any unpaid liabilities to the shareholders, all shares of stock shall be redeemed and cancelled. In no event shall distribution of assets to
   any shareholder be of net assets less than the value then due him or her for
   such stock on a pro rata basis using appropriate appraisal values as the basis
   for determining the pro rata amount applicable to each share of stock.

4. Shareholders agree, in
   accordance with � 16-10-78 U.C.A., to execute a voluntarily dissolution by
   consent of shareholders. The officers
   of the Corporation shall file such voluntarily dissolution by consent of
   shareholders with the Division of Corporations and Commercial Code.

5. The officers of the
   Corporation shall file all other forms and documents required by the State of
   Utah, the federal government, including tax returns, as soon as possible after
   distribution of the corporate assets.

6. The officers and directors
   of the Corporation are empowered, authorized and directed to carry out the
   provisions of this plan of liquidation and to take any further action that may
   be necessary in liquidating and dissolving the Corporation in accordance with
   the express intent of the shareholders under the plan adopted.

Dated this XXXXX day of XXXXX, 1992.

XXXXX, Secretary

Verification

State of Utah

ss.

County of Utah

On the XXXXX day of XXXXX, 1992, personally appeared before me. XXXXX, who duly acknowledged to me that he
is the secretary of XXXXX, a Utah Corporation and that he signed the foregoing
certified copy of resolution after reviewing the same and certifying that the
same is a true and correct copy of the plan of liquidation adopted by said
corporation.

XXXXX

Subscribed and sworn to before me this XXXXX day of XXXXX, 1992.

Notary Public