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Business Taxes Law Guide—Revision 2024

Sales and Use Tax Annotations


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395.0000 Occasional Sales—Sale of a Business—Business Reorganization—Regulation 1595

Annotation 395.2157

(j) Mergers and Reorganizations

(1) Mergers

395.2157 Transfer of Capital Equipment Between Subsidiaries. Company A owned a chain of fast food restaurants. It transferred certain capital equipment to Company B. Companies A and B were wholly owned subsidiaries of Company C. Company A was not successful and it was decided to convert its existing restaurants into Company B's restaurants. The restaurants that could not be converted were to be closed. It was also decided to merge Company A into Company B "on the last day of fiscal 1971." As of December 20, 1970, Company A owed Company B $630,000. Company A transferred to Company B various properties on December 20, 1970; February 14, 1971; April 11, 1971; May 9, 1971, and July 4, 1971. On July 3, 1971, Company C transferred its capital stock in Company A to Company B. In anticipation of the transfer, on June 23, 1971, the directors of Company B authorized the merger of Company A into Company B. The merger was legally effective August 1, 1971.

Company A believes that the five transfers were only steps in the tax free liquidation of Company A and that no taxable transactions or sales of assets took place between the subsidiary corporations. Company A also believes that all transactions were made as a general plan of reorganization and do not bring about a taxable event. Company A argues that: (1) the sales were exempt occasional sales under sections 6006.5 and 6367, (2) the transfers were not for value, (3) the transfers were not sales, or (4) the transfers were "forced transfers more akin to the taking of title to assets by a creditor to satisfy an indebtedness."

Tax is properly due in this case. Although Companies A and B are related corporations and it was contemplated that Company A would be liquidated into Company B, several sales actually took place. The tax could have been avoided if Company A had sold all of its assets to Company B in a single sale, or if title to Company A's assets had passed to Company B by operation of law as a result of a statutory merger. However, neither of these courses of action were followed by the parties. With respect to Company A's specific arguments: (1) The sales are not exempt under sections 6006.5 and 6367 because the property transferred was held or used in the course of an activity requiring the holding of a seller's permit and the transfers were not, individually, transfers of all or substantially all of the property held or used by Company A in its permit requiring activities. (2) The transactions are clearly "sale" transactions and the transfers would be for "value" even if Company B merely canceled a portion of Company A's outstanding indebtedness in exchange for the assets. (3) Cancellation of indebtedness is sufficient consideration to support the transfers as sales transactions. (4) It is immaterial that Company A may have been in the position of a "threatened" debtor of B. The transfers were entirely voluntary. Even if Company B seized the assets of Company A pursuant to the default provisions of a general financing agreement, tax would be applicable on the sale of the assets in satisfaction of outstanding obligations. 1/14/72. (Am. M99–1).