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Business Taxes Law Guide—Revision 2024
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
S
495.0000 Sale
Annotation 495.0736.720
(d) Transfers Between Related Legal Entities
495.0736.720 Transfer of Assets to Creditors/Shareholder. Individuals A and B formed X Corporation in 1947, each contributing $500 to the corporation and each receiving a $500 share holding interest. The corporation was created to engage in the business of buying and selling objects of art. Individual A, during the four years of operation, loaned $224,681 to X Corporation. In the fourth quarter of 1951, when dissolution of the corporation was effected, individual A received all the paintings on hand from X Corporation valued at $187,293 by the X Corporation. In his books, individual A debited the assets "Paintings" in this amount, debited "bad debts" for $37,388, and credited "accounts receivable" for $224,681.
Individual A claimed the $37,388 as a short-term capital loss deduction on his 1951 calendar year Federal Income Tax return as a nonbusiness bad debt under section 23(K)(4) of the Federal Internal Revenue Code. Assuming individual A did not acquire the artwork for resale, the tax applies to the transfer of the artwork. The gross receipts are $187,293 ($224,681 less $37,388.) Clearly the moneys transferred to the X Corporation were handled by the parties as a loan. When the paintings were transferred to individual A, the transaction was handled as a transfer of title to satisfy a loan on individual A's books. Individual A took a deduction for a loan on his 1951 Federal Income Tax return.
In other words, X Corporation has transferred title to the paintings to satisfy a creditor of the corporation. This claim had to be satisfied before assets could be distributed to the two shareholders. 9/16/53.