Cal-Metal Corp. v. State Bd. of Equalization

• Decision Date: 09 November 1984
• Docket Number: CAL-METAL
• Citation: 161 Cal.App.3d 759,207 Cal.Rptr. 783
• Court: California Court of Appeals Court of Appeals
• Parties: CORPORATION, a California Corporation, Plaintiff and Appellant, v. CALIFORNIA STATE BOARD OF EQUALIZATION, Defendant and Respondent. Civ. B005301.

Page 783

207 Cal.Rptr. 783

161 Cal.App.3d 759

CAL-METAL CORPORATION, a California Corporation, Plaintiff and Appellant, v. CALIFORNIA STATE BOARD OF EQUALIZATION, Defendant and Respondent.

Civ. B005301.

Court of Appeal, Second District, Division 7, California.

Nov. 9, 1984.

As Modified Dec. 3, 1984.

Martin & Deacon and John Deacon, Los Angeles, for plaintiff and appellant.

John K. Van De Kamp, Atty. Gen., Edmond B. Mamer and Patti S. Kitching, Deputy Attys. Gen., for defendant and respondent.

JOHNSON, Associate Justice.

This appeal challenges the trial court's granting of summary judgment in favor of the respondent. Two central issues are raised on appeal. First, does the transfer of property to a commencing partnership in which the partnership assumes the indebtedness of the transferor, a co-partner, constitute a sale under the California Revenue and Taxation Code. Second, assuming a sale, is it proper to assess the transferor's tax liability based on the total amount of the indebtedness assumed by the partnership. Because we find the trial court properly decided these issues, we affirm.

I. FACTS AND PROCEEDINGS BELOW

On February 1, 1980, the appellant and Millsteel Company ("Millsteel") entered into a partnership agreement. As part of the agreement, the appellant transferred equipment to the partnership valued at $2,800,000. The partnership agreed to assume the liabilities on the equipment in the amount of $1,242,435. Thus the appellant's capital contribution to the partnership was $1,557,565.

The State Board of Equalization (the "Board") determined the above transaction constituted a taxable sale under Revenue and Taxation Code section 6001 et seq. and Sales and Use Tax Regulation 1595(b)(4). The Board determined the amount of sale subject to taxation was $1,056,070, as to which the Board imposed a tax of $62,814.24 plus interest in the amount of $6,132.93. ¹

On February 10, 1981, the Board issued a Notice of Determination of Sales and Use Tax Deficiency pursuant to Revenue and Taxation Code section 6486. It informed the appellant of the amount of assessed tax as described above.

On March 11, 1981, the appellant filed a Petition for Redetermination of Tax. On July 17, 1981, the Petition was heard. On August 11, 1981, the Board issued its decision refusing to adjust the original determination. On October 19, 1981, the Board issued a Notice of Redetermination confirming the assessment of tax in the amount of $62,814.24 and redetermining interest in the amount of $11,158.05.

The appellant paid the total assessment of $73,972.29 on October 29, 1981. On On September 7, 1983, the appellant filed a Notice of Motion and Motion for Summary Judgment. On October 19, 1983, the Board filed a similar motion. Both motions were argued before the trial court, and after supplemental briefing, the court, on November 29, 1983, issued its minute order granting the Board's motion and denying the appellant's motion. On February 9, 1984, the court executed and filed a summary judgment.

February 8, 1982, the appellant filed a Claim of Refund with the Board. This was denied on March 31, 1982. On June 29, 1982, the appellant filed a complaint for recovery of overpayment of the tax with the trial court.

A timely notice of appeal was filed on February 24, 1984.

II. THE TAXPAYER TRANSFERRED EQUIPMENT TO A COMMENCING PARTNERSHIP AND RECEIVED AS CONSIDERATION AN ASSUMPTION OF INDEBTEDNESS. THIS WAS A TAXABLE SALE UNDER THE SALES AND USE TAX LAW.

The appellant (the "taxpayer") contends the transfer of equipment to the partnership in return for the partnership's assumption of the equipment's liability was not a sale and therefore was not a taxable transaction. In particular, the taxpayer challenges Sales and Use Tax Regulation 1595(b)(4) which unambiguously states such a transaction is taxable. The taxpayer contends this regulation is inconsistent with Revenue and Taxation Code section 6001, et seq.

"The Legislature has delegated to the Board the duty of enforcing the sales tax law, and the authority to prescribe and adopt rules and regulation. (Rev. & Tax.Code §§ 7051, 7052.)" (Henry's Restaurants of Pomona, Inc. v. State Bd. of Equalization (1973) 30 Cal.App.3d 1009, 1020, 106 Cal.Rptr. 867.) When the Board has promulgated a formal regulation which determines the proper classification of the taxable event without interpretation or construction of the regulation, the proper scope of review is one of limited judicial review. The standard is whether the regulation was arbitrary, capricious, or had no reasonable or rational basis. (Culligan Water Conditioning v. State Bd. of Equalization (1976) 17 Cal.3d 86, 92-93, 130 Cal.Rptr. 321, 550 P.2d 593; Duffy v. State Bd. of Equalization (1984) 152 Cal.App.3d 1156, 1166, 199 Cal.Rptr. 886; see also Lockheed Aircraft Corp. v. State Bd. of Equalization (1978) 81 Cal.App.3d 257, 270, 146 Cal.Rptr. 283 [board's definitions of taxable property must fall within the ambit of the tax statutes and be reasonable classifications thereunder.].)

We start with an overview of the taxing statutes themselves.

Revenue and Taxation Code section 6006(a) broadly defines a "sale" as "[a]ny transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration ...." ² This definition coincides with the common-law definition of a "sale" and parallels the Commercial Code definition. (Select Base Materials v. Board of Equalization (1959) 51 Cal.2d 640, 645, 335 P.2d 672; King v. State Bd. of Equalization (1972) 22 Cal.App.3d 1006, 1012, 99 Cal.Rptr. 802.) The consideration need not be money, it may be any valuable consideration. (See Newco Leasing, Inc. v. State Bd. of Equalization (1983) 143 Cal.App.3d 120, 126-127, 191 Cal.Rptr. 588, [assumption of liability constitutes consideration for transfer of property].)

The amount of sales tax is measured by the "gross receipts" received. ( § 6051.) "Gross receipts" is defined as "[t]he total amount of the sale or lease or rental price ... of the retail sales of retailers, valued in money or otherwise ...." ( § 6012.) ³ As The taxpayer's transaction was a taxable transaction under the code since the transaction constituted a sale under section 6006(a). The taxpayer indisputably transferred title of the property to the partnership. As the partnership agreement stated, "CMC [the taxpayer] shall contribute all its right, title, and interest in the property ...." Furthermore, the appellant received valuable consideration for this transfer. As the agreement states, "... the partnership shall assume the liabilities ... therein." Such assumption of liabilities constituted valuable consideration.

stated earlier, the assumption of liability owed by a transferor of property can constitute the consideration for the transfer. That consideration is the measure of the [161 Cal.App.3d 765] sale price and thus the measure of the ultimate tax liability. (Newco Leasing, Inc. v. State Bd. of Equalization, supra, 143 Cal.App.3d at p. 126, 191 Cal.Rptr. 588.)

The taxpayer nevertheless contends it did not sell the equipment to the partnership, it merely contributed the equipment. In support of this argument, the appellant cites Milana v. Credit Discount Co. (1945) 27 Cal.2d 335, 339, 163 P.2d 869, and H.S. Crocker Co., Inc. v. McFaddin (1957) 148 Cal.App.2d 639, 644, 307 P.2d 429, and draws from these cases the conclusion the hallmark of a transaction denoting a sale is the absolute nature of the right being transferred. While we do not dispute this conclusion, we are hard pressed to understand how this supports the taxpayer's position. As stated above, the partnership agreement expressly provided all rights, title, and interest in the property was transferred to the partnership. Given this express provision, it's difficult to see how the appellant can contend it did not transfer its right absolutely. The McFaddin court itself recognized, "If there is a transfer of ownership the transaction is a sale." (Cites omitted.) (H.S. Crocker Co., Inc. v. McFaddin, supra, 148 Cal.App.2d at p. 644, 307 P.2d 429.)

The taxpayer apparently wants this court to ignore the fact the property was transferred to a separate legal entity, the partnership. For instance, the appellant argues there was no absolute transfer of ownership since the appellant as co-general partner retained a say in the use of the equipment. However, as the Board correctly points out, although under traditional legal concepts the partnership was regarded merely as an aggregate of individuals, this is no longer the case. As stated in White v. Cox (1971) 17 Cal.App.3d 824, 828, 95 Cal.Rptr. 259, "[U]nincorporated associations are now entitled to general recognition as separate legal entities ...." (See also People v. Sobiek (1973) 30 Cal.App.3d 458, 467, 106 Cal.Rptr. 519, cert. den., (1973) 414 U.S. 855, 94 S.Ct. 155, 38 L.Ed.2d 104, [partner who stole partnership property could be found guilty of stealing property "of another", in part, because a partnership is a separate legal entity]; Barr v. United Methodist Church (1979) 90 Cal.App.3d 259, 265, 153 Cal.Rptr. 322, cert. den., (1979) 444 U.S. 973, 100 S.Ct. 468, 62 L.Ed.2d 388.) California statutory law has also adopted this position. (See White v. Cox, supra, 17 Cal.App.3d at p. 827, 95 Cal.Rptr. 259; see also § 6005.) The taxpayer having chosen to conduct its business under a particular arrangement cannot disregard such an arrangement when it would be to the taxpayer's advantage. (Gray v. Powell (1941) 314 U.S. 402, 414, 62 S.Ct. 326, 333, 86 L.Ed. 301; Higgins "As ... many ... cases have pointed out, a business may elect various forms to accomplish what it regards as valuable advantages. If it elects to conduct that business through the device of separately incorporated, although wholly owned subsidiaries, and thereby obtain the advantages of separate...