Response June 19, 1992
June 19, 1992
XXXXX
Re: Advisory Opinion -
Corporate Liquidation
Dear XXXXX:
This letter is in response to your recent request for a Tax Commission
ruling on whether sales tax is due on the transfer of vehicles to shareholders
after a complete liquidation of corporate assets.
The Tax Commission policy is to refer such requests to the division
most qualified to analyze the request and make recommendations concerning
it. As such, your request was referred
to the Tax Commission's Auditing Division for their analysis and
recommendations. The division's
recommendations are as follows:
1. A complete liquidation of
all corporate assets and discontinuation of business activities does qualify as
a business reorganization for the purpose of satisfying Sales Tax Rule
R865-19-38S.
2. A sale as defined in
59-12-102(10) does take place in the transfer of a vehicle from a corporation
to a shareholder in exchange for shares of capital stock. The shares of stock had value equal to the
net value of the assets. The corporation
does receive "consideration" which is the value of the shares.
3. The transfer of vehicles to
shareholder "A" who was a 49.7% owner and to shareholder
"C" who was a 49.9% owner is taxable because neither shareholder
owned 80% or more of the shares of stock.
Based upon the facts presented in your letter, we are in agreement with
the Auditing Division's recommendations.
Obviously, if there are deviations from these facts, this opinion may be
negated.
If you do not agree with this determination, you may appeal to the Tax
Commission for a formal hearing. The
results of that hearing would constitute a declaratory judgment and be
appealable to the Utah State Supreme Court.
A Notice of Appeal Rights and a copy of the Utah Taxpayer Bill of Rights
are attached.
For the Commission
Joe B. Pacheco
Commissioner
Utah State Tax Commission
Heber M. Wells Building
Salt Lake City, Utah 84114
Attn: XXXXX
Dear Members of the Commission:
I am writing to you to seek an advisory opinion regarding the sales tax
liability due on distribution of vehicles owned by a corporation to its
shareholders incident to a complete dissolution and secession of its affairs.
FACTS
We have a client which has been a corporation of over 30 years. It is owned by four shareholders with the
following shares:
Shareholder "A"
XXXXX
Shareholder "B"
XXXXX
Shareholder "C"
XXXXX
Shareholder "D"
XXXXX
The corporation has been winding down for a number of years as
Shareholder "A" and "C" were approaching retirement
age. On XXXXX, 1991, they elected to
cease actively entirely and liquidate the corporation under Section 331 of the
Internal Revenue Code. A copy of the
plan of liquidation is enclosed herewith.
Pursuant to the plan of liquidation, all assets were required to be
distributed to the shareholders within 30 days of XXXXX, 1992. There are several motor vehicles owned by
the corporation, which pursuant to the plan of liquidation are to be
distributed to the shareholders. Since
Shareholder "B" and "D" own very minor shares, their shares
are being redeemed by cash.
Shareholders "A" and "C" are being redeemed in
exchange for the assets owned by the corporation.
ISSUE
The issue upon which an advisory opinion is sought is whether the
transfer of the vehicles by the corporation to its shareholders as part of a
complete liquidation of the corporation is a taxable event for sales tax
purposes?
LEGAL ANALYSIS
Sales tax is imposed by Section 59-12-103(1)(a) U.C.A., on retail sales
of tangible personal property made within the state. A sale includes any transfer of title, but it must be for "a
consideration." Section
59-12-102(10) U.C.A. Certain sales are
exempt, including "isolated or occasional sales by persons not regularly
engaged in business, except the sale of vehicles or vessels required to be
titled or registered under the laws of this State." Section 59-12-104(14) U.C.A. The Commission, by rule, has continued the
pre-1987 provisions of the sales tax code dealing with business reorganizations
by providing as follows:
C. Sales of vehicles required
to be titled or registered under the laws of this state are not isolated or
occasional sales, except that any transfer of a vehicle in a business
reorganization where the ownership of the transferee organization is substantially
the same as the ownership of the transferor organization shall be considered an
isolated or occasional sale.
Finally, the Utah Supreme Court in a recent case, addressed the
predecessor statute on some of these issues.
In BJ-Titan Services v. State Tax Commission, 183 Utah Adv. Rpt. 20
(Utah 1992), the Utah Supreme Court addressed the issues of both consideration
and reorganization. The taxpayer was
unsuccessful in asserting reorganization treatment. The Court found that a venture between two entities forming a new
general partnership was not a continuation of the old organizations, since 80%
of the ownership was not retained by the corporation which previously owned the
vehicles in question. The Court cited
with approval, however, 19 Am. Jur. 2d Corporation § 2514, finding that the
general rule for a reorganization ". . . is not ordinarily the combination
of several existing corporations, but is simply the carrying out by proper
agreement and legal proceedings of a business plan for winding up the affairs
of . . . [a corporation] XXXXX, at 26.
The Court further addressed three cases raised by the taxpayer in
footnote 7. The cases cited by the
taxpayer, dealt with the threshold issue of consideration under the definition
of a retail sale. The Court
observed: "These cases necessarily
turn on a question of fact: was there
consideration for the transfer of assets?
To make this determination, the terms and circumstances of the
transaction must be examined. Because
this argument was not presented to the Commission below, a finding of fact on
consideration has not been made, and we will not indulge in such evidentiary
endeavors." Supra, at 26.
Argument
There are two basis that the taxpayer can assert non-taxability of the
above transaction:
1. A complete liquidation of
the corporation under Section 331 of the Internal Revenue Code is a business
reorganization under Rule 865-19-38S since the shareholders who previously
owned the bulk of the stock of the corporation are the same who are receiving
the assets in the complete liquidation of the corporation.
2. As observed by the Utah
Supreme Court in XXXXX, supra, the exchange of stock in a complete liquidation
of corporation may not be for consideration as required by the definition of a
sale found in § 59-12-102(10), U.C.A.
I appreciate your expeditious handling of this request for advisory
opinion since the Internal Revenue Code Requires the liquidation to be
completed within 30 days of XXXXX, 1992.
Thank you for your assistance regarding this request.
Sincerely,
XXXXX
Certified Copy of Plan of Liquidation of
XXXXX, a Utah Corporation
I hereby certify that the following Plan of Liquidation was unanimously
adopted at a special meeting of the shareholder of XXXXX, held on the XXXXX day
of XXXXX, 1992:
1. Within 30 days after the
date of the meeting at which the shareholders adopt a plan of liquidation, the
corporate officers shall file Form 966 with the District Director of Internal
Revenue, Salt Lake City, Utah, together with a certified copy of this plan of
liquidation.
2. The Corporation shall make
distribution to its shareholders of all assets of the Corporation after
proceeding as far as possible to collection any account receivable and to pay
any debts associated with said assets.
3. After distribution of all
assets subject to any unpaid liabilities to the shareholders, all shares of stock shall be redeemed and cancelled. In no event shall distribution of assets to
any shareholder be of net assets less than the value then due him or her for
such stock on a pro rata basis using appropriate appraisal values as the basis
for determining the pro rata amount applicable to each share of stock.
4. Shareholders agree, in
accordance with § 16-10-78 U.C.A., to execute a voluntarily dissolution by
consent of shareholders. The officers
of the Corporation shall file such voluntarily dissolution by consent of
shareholders with the Division of Corporations and Commercial Code.
5. The officers of the
Corporation shall file all other forms and documents required by the State of
Utah, the federal government, including tax returns, as soon as possible after
distribution of the corporate assets.
6. The officers and directors
of the Corporation are empowered, authorized and directed to carry out the
provisions of this plan of liquidation and to take any further action that may
be necessary in liquidating and dissolving the Corporation in accordance with
the express intent of the shareholders under the plan adopted.
Dated this XXXXX day of XXXXX, 1992.
XXXXX, Secretary
Verification
State of Utah
ss.
County of Utah
On the XXXXX day of XXXXX, 1992, personally appeared before me. XXXXX, who duly acknowledged to me that he
is the secretary of XXXXX, a Utah Corporation and that he signed the foregoing
certified copy of resolution after reviewing the same and certifying that the
same is a true and correct copy of the plan of liquidation adopted by said
corporation.
XXXXX
Subscribed and sworn to before me this XXXXX day of XXXXX, 1992.
Notary Public