Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2011
Sales and Use Tax Memorandum Opinions
Where there is a business purpose for carrying out a transaction in steps, the tax implications of the individual steps will not be ignored.
Where a person who was a partner in a partnership which was dissolved sells assets of the former partnership, the sale is an exempt occasional sale if the person has not made other sales within a twelve month period.
BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA
In the Matter of the Petition of GEORGE BAJCZY dba PRECISION MACHINED PARTS CO. for Redetermination of Sales Tax
For Petitioner: Lawrence S. Wayne Attorney at Law
For Staff: W. E. Burkett Tax Counsel
This opinion considers the petition of George Bajczy for redetermination of a sales and use tax deficiency determination in the amount of $1,415.68 plus statutory interest. The tax is measured by the audited sales price of tangible personal property considered to have been sold at retail on December 20, 1966.
Petitioner was formerly associated with a Mr. Dave Watanabe in a partnership which operated a machine shop. A seller's permit was required for the operation of the business activity. The parties encountered difficulties in the operation of the business and a decision was made to dissolve the partnership. Petitioner located three other individuals who were interested in investing in the business if petitioner could secure the interest of Mr. Watanabe.
On December 20, 1966, petitioner acquired Mr. Watanabe's 50 percent interest in the partnership including his interest in the partnership assets for the sum of $3,000 plus an agreement to assume all liabilities and obligations incurred on behalf of the partnership. On this same date petitioner sold a 50 percent interest in the business to the three individuals for the amount of $4,312 subject to the existing business liabilities. Petitioner and the three other individuals subsequently transferred the business to a commencing corporation in exchange for stock and other consideration.
The staff considered the transfer from petitioner to the three individuals to be a retail sale subject to the sales tax and assessed tax measured by the audited sales price of the tangible personal property assets transferred (per former sales and use taxes ruling 81 [new regulation 1595]).
It is petitioner's contention that the transfer to petitioner was not a sale because it was only a step in the process of making the transfer to the corporation and for the additional reason that petitioner received no economic gain (consideration) from the intervening transfer. This latter contention is founded upon the claim that petitioner was required to retain all excess purchase funds for use in the operation of the business. If the transfer from petitioner to the three individuals is held to be a sale then it is submitted that the transfer qualifies as an occasional sale. This alternative ground for exemption is based upon the contention that the property sold by the petitioner was not held or used in an activity for which a seller's permit was required (Revenue and Taxation Code section 6006.5(a)).
A determination that the transfer of the property to three individuals in form was merely a step in the process of making a transfer to a new corporation and not a separate sale is dependent upon a finding that there was no business purpose for the separate transfer (see Gregory v. Helvering, 293 U. S. 465). We believe a finding that there was a business purpose for the separate transfer is warranted. Since Mr. Watanabe did not consent to a transfer of the partnership assets to a corporation it was necessary for petitioner to acquire the interest of Mr. Watanabe before the business could be transferred to the corporation. In order to obtain the funds to buy out Mr. Watanabe petitioner contracted with the three individuals to transfer Mr. Watanabe's interest to them. There is no indication that the three individuals agreed to advance the funds without consideration and the corporation did not have any assets to fund the purchase. It is, therefore, evident that the agreement to transfer an interest to the three individuals was essential to the petitioner's acquisition of Mr. Watanabe's interest. Additionally, petitioner, in his individual capacity, received a consideration which differed from the consideration paid to Mr. Watanabe. The corporation did not participate in this bargain and sale transaction.
The contention that petitioner did not receive consideration because of the requirement that the excess purchase funds be used in the business is without merit. Such a contractual restriction does not disqualify a benefit as consideration given for a sale so long as the recipient acquires the use and benefit of the property through his ownership interest in the corporation. The classification of a transaction as a sale for sales tax purposes is not precluded by the absence of profit on the transfer (Union League Club v. Johnson, 18 Cal.2d 275).
The remaining question is whether the transfer qualifies as an occasional sale under the provisions of section 6006.5(a) of the Revenue and Taxation Code. In order to qualify as an occasional sale under this provision of the statute it is required that the property not be held or used in an activity for which a seller's permit was required and that the subject transfer not be one of a series of sales sufficient in number, scope, and character to require the holding of a seller's permit.
Upon acquiring the interest of Mr. Watanabe the petitioner held the entire ownership interest in business assets which had been held and used in an activity for which a seller's permit was required. However, the business activity was actually carried on by a separate jural person, the partnership. Petitioner did not engage in any business activity in his individual capacity prior to the sale nor did he make any other retail sales of tangible personal property in his individual capacity.
Having found that there was a good business purpose for the separate transfers, we conclude that petitioner's single sale of assets to the three individuals qualified as an occasional sale under section 6006.5(a) of the code and is exempt from taxation under the provisions of section 6367.
Done at Sacramento, California, this 8th day of December 1970.
George R. Reilly, Chairman
John W. Lynch, Member
Richard Nevins, Member
Attested by: H. F. Freeman, Executive Secretary