Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

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McConville v. State Board of Equalization . . . (1978)

The Depreciation of Property Held For Resale Is A Taxable Use

Taxpayer held a seller's permit and was engaged in the business of buying, breeding, and selling horses. Taxpayer held twenty horses for resale during the period July 1, 1969 to December 31, 1971 consisting of one "teasing stallion" and nineteen mares. Each mare was bred while being held for resale and was either in foal or with a foal at its side. Although taxpayer contended that breeding the mares was not a use inconsistent with the holding of them for resale and hence subject to use tax, it capitalized the mares on both its federal and state income tax returns.

The court of appeal held that breeding the mares was a reasonable incident to the sale and was not a use incompatible with the requirement that the mares be held only for demonstration or display. The court did, however, find that taxpayer's depreciation of the mares on its federal and state income tax returns evidenced an intent to use the animals other than for retention, demonstration, or display. The court further found that resale inventory is not ordinarily subject to a depreciation allowance as a capital asset for income tax purposes. Accordingly, the court upheld the use tax. McConville v. State Board of Equalization (1978) 85 Cal.App.3d 156.