Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

A    B    C    D    E    F    G    H    I    J    L    M    N    O    P    R    S    T    U    V    W    X   



Annotation 395.2544


395.2544 Transfer of Assets to Subsidiary. A taxpayer, a California general partnership, conveyed certain assets to its wholly owned subsidiary corporation. The conveyance was described in the transfer agreement as a "contribution to capital." The conveyance was not given in exchange for stock, and the subsidiary assumed certain liabilities as part of the transaction.

While capital contributions are generally not taxable, if the transfer is subject to debt assumed by the transferee, the transaction does not qualify as a capital contribution for sales and use tax purposes, but rather is a taxable sale measured by the assumed liabilities. Where the property transferred, as in this case, includes both tangible personal property as well as other property (such as stock or real property), the consideration must be allocated between the taxable sale of tangible personal property and the nontaxable sale of other assets. The allocation would be as follows: Tangible personal property conveyed divided by all assets conveyed multiplied by liabilities assumed equals taxable measure.

The parties to the transaction are not permitted to allocate liabilities among the assets transferred to reduce the tax liability. Hence, if the only liability assumed was a mortgage against real property, the Board would not consider that there was no taxable consideration paid for the tangible personal property component of the sale. Rather, the formula described above would be used to allocate a portion of the assumed liabilities to the sale of the tangible personal property. 8/01/96.