Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 395.0074


395.0074 Series of Separate Transactions. Corporation A will enter into a stock sale agreement with a buyer who is interested in purchasing a division of Corporation A. To facilitate such sale, Corporation A will contribute the assets and property of the division to its newly formed subsidiary in exchange for the first issuance of the subsidiary stock. The subsidiary will not assume any liabilities of Corporation A and Corporation A will not receive any cash, notes, or other consideration for its transfer of assets to the Subsidiary. The buyer will then purchase the subsidiary stock from Corporation A.

The transaction is structured as a stock sale in order to preserve Corporation A's rights to transfer its interest in various real property leases that it currently maintains with another party. Once the proposed transaction takes place, Corporation A will request the other party to execute a lessor's estoppel certificate. Should the other party refuse, the transaction will nonetheless proceed as described above. The buyer then proposes to liquidate the subsidiary corporation and distribute its assets as a complete liquidation to the buyer.

Multiple transactions between several parties of this type require a two-tier analysis. First, each step in the series of transactions must be analyzed to ascertain that there is a taxable transaction between two parties. Second, the transaction must be collectively analyzed to determine if, under California Sales and Use Tax Law, the intervening steps of the transaction should be disregarded and the transactions should be analyzed only on a before and after basis, with all intervening steps of the transaction disregarded if they are undertaken for purposes of avoiding or altering the California sales and use tax liabilities of the parties.

In the first transaction, Corporation A's transfer of assets from one of its divisions to a newly formed subsidiary solely in exchange for first issuance of the subsidiary stock will not constitute a taxable sale or purchase of tangible personal property since no consideration was involved in the transaction.

In the next transaction, no sales or use tax will be owed by Corporation A or the buyer upon the sale by Corporation A of the subsidiary stock to the buyer. Stock is not regarded as tangible personal property for purposes of the Sales and Use Tax Law.

When an entity distributes its assets as a complete liquidation ratably to the owners, the transfer will not be taxable unless consideration is received for the transfer, such as an assumption of indebtedness. Since the buyer will not assume the liabilities of the subsidiary upon liquidation and the subsidiary will not receive any other consideration, the liquidation is not taxable.

When there is no valid business purpose for structuring a series of transactions to achieve the ultimate transfer of property other than for avoidance of sales or use tax, the series of transactions will be disregarded and the transaction will be viewed as a taxable sale of tangible personal property from Corporation A to the buyer.

The transaction is structured as described so that the buyer will be permitted to benefit from several favorable leases of real property by the other party to Corporation A without the need to obtain the other party's consent. Corporation A believes that its leases with the other party permits it to transfer property subject to these leases to a wholly owned subsidiary and then sell the stock of that subsidiary without obtaining the other party's consent. However, the transaction will proceed as described whether or not the other party provides the buyer with a lessor's estoppel certificate. That is, the alleged benefit sought by this structure is not significant. Rather, it appears that the reason for this structure is to avoid sales and use tax. If such is the case, the transaction is regarded as structured in this manner to avoid sales tax and the transaction would be treated as a taxable sale from Corporation A to the buyer. 6/30/95.