Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 395.1992


395.1992 Sale of Business—Commencing Corp. A owned a machine shop as a sole proprietor. On June 26, 1965, he entered into joint venture B with Corporation C to carry out certain operations. As part of the joint venture, Corporation C had the option to incorporate both the machine shop business and the joint venture business into it through the purchase of A's business. The option provided for the issuance of 52 shares of C to A and a note to A for $30,000 payable in annual installments of $5,000. The option was for one year and 30 days notice had to be given. A made a covenant that he would not incur debt other than in the ordinary course of business without C's consent. On December 2, 1965, Corporation D was formed. At its organizational meeting, A was elected president. A offered to transfer all of the assets and liabilities of his business to D for 1000 shares for D's stock. The proposal was accepted.

On the same date, the option agreement between A and C was amended to provide that C would have the option to acquire the 1000 shares of D.

On February 11, 1966, C exercised its option to acquire 1000 shares.

Tax applies to the transfer of assets by A to D since D assumed the liabilities of A. Regulation 1595(b)(4).

The transfer of the stock to C is a nontaxable sale of intangible. While it may be true that had the original option been exercised a sale of tangible personal property would have taken place, the transaction was changed. All of the legal requirements for the incorporation, issuance of stock and subsequent sale of the stock were met. The transaction was not a sham. 3/29/68.