Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 395.1575


395.1575 Common and Preferred Stock—Similar Ownership. Company X invested $13 million in Company Y and received 1,500,000 shares of Preferred Series A and 500,000 shares of Preferred Series B stock. Other investors own 306,000 shares of common stock of Y with outstanding options to purchase 19,000 shares of common stock. Company Y will dissolve and all its assets will be transferred to X in exchange for debt owed to X. X will also pay the common stockholder of Y the payment which they have been guaranteed for their stock. X will then contribute assets of Company Y to a joint venture.

In determining if the ownership in a corporation will be substantially similar (80%) after the transfer of assets from Y to X, all persons holding an ownership interest in the corporation must be included in calculating the percentage of ownership interest in that corporation. (Regulation 1595(b)(2).) When all ownership interests are represented by one class of stock, it is easy to determine whether the 80% rule is satisfied. However, when there are two or more types of ownership interests, calculating the percentage of ownership interest must be computed on the relative values of such ownership. Since the value of the respective stocks was not provided, a definitive answer to the question cannot be made. In some cases, it may be necessary to have an audit to determine the relative value of the two types of stock. Ownership will be substantially similar only if the transferee owns 80% of the total value of the corporation. 8/30/88.