Is it a taxable sale when a company moves a division's assets into a brand-new corporation in exchange only for that corporation's stock?

Plain-English summary

Binghamton Burial Vault Co., Inc. planned to spin its Binghamton Precast & Supply division into a newly created corporation: it would transfer the division's assets to the new company in exchange for that company's stock, then hand the stock out pro-rata to its own shareholders. It asked whether that transfer triggers sales tax.

The Department said no — with conditions and a compliance reminder.

• Assets-for-stock at organization is not a retail sale. Tax Law § 1101(b)(4)(iii)(D) and 20 NYCRR § 526.6(d) exclude from "retail sale" the transfer of property to a corporation upon its organization in consideration for the issuance of its stock. So the transfer is not subject to sales tax.
• It has to be a genuine "upon organization" transfer. The exclusion applies only to transfers made at the commencement of the corporation's business or within a reasonable time while it is still organizing. A transfer to a dormant corporation being activated later does not qualify (the regulation's Example: a truck transferred years after incorporation is a taxable retail sale).
• Extra consideration is taxable. If the transfer is for stock plus other consideration (cash, notes), it is a taxable sale to the extent of that other consideration (§ 526.6(d)(5)). But merely assuming debts/security interests in the transferred property does not defeat the exclusion.
• It's still a bulk sale. The transaction is a bulk sale under 20 NYCRR § 537.1 (a transfer of business assets outside the ordinary course by a person required to collect tax). Binghamton must file a notice of bulk sale with the Department and may contact the Central Office Audit Bureau, Bulk Sales Unit, for help.

What this means for you

Reorganizing into a new entity for stock is generally sales-tax-free. When you move equipment, inventory, or other tangible assets into a newly formed corporation and take back only its stock, New York treats it as a corporate formation, not a taxable sale. This is the ordinary spin-off / incorporation pattern.

Watch three things that can change the result. (1) Timing — the corporation must actually be organizing; don't route assets through a long-dormant shell. (2) Consideration — anything beyond stock (cash, promissory notes) is taxable to the extent of that value. (3) Debt assumption is fine — taking the assets subject to existing security interests doesn't blow the exclusion.

Don't forget the bulk-sale notice. Even a tax-free transfer is a bulk sale. File the required notice so you don't inherit successor liability for the transferor's unpaid sales tax.

Common questions

Q: We're putting a division's assets into a new corporation for its stock. Do we owe sales tax?
A: No, if it's done upon the new corporation's organization and solely for stock — that's excluded from "retail sale" under § 1101(b)(4)(iii)(D).

Q: What if the new corporation also pays us cash or notes?
A: Then it's a taxable sale to the extent of that other consideration. Assuming debts secured by the transferred property, though, doesn't make it taxable.

Q: Is there any filing we still have to make?
A: Yes. The transfer is a bulk sale under § 537.1, so you must file a notice of bulk sale with the Department.

Citations and references

Statute and regulation:

• Tax Law § 1101(b)(4)(iii)(D) — the transfer of property to a corporation upon its organization in consideration for the issuance of its stock is not a retail sale
• 20 NYCRR § 526.6(d) — exclusions for corporate/partnership transactions; the "upon organization" timing rule, the dormant-corporation limit, the treatment of additional consideration (§ 526.6(d)(5)), and the debt-assumption rule
• 20 NYCRR § 537.1 — defines "bulk sale" (a sale/transfer in bulk of business assets outside the ordinary course by a person required to collect tax), triggering the notice-of-bulk-sale requirement

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a89_4s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (4)S
Sales Tax
January 31, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S881114A

On November 14, 1988, a Petition for Advisory Opinion was received from Binghamton
Burial Vault Co., Inc., Phelps Street, Binghamton, New York 13901.
The issue raised is whether a transaction, in which a corporation transfers the assets of a
division to a newly created corporation in exchange for stock of such newly created corporation,
qualifies for the exclusion from sales tax provided under Section 1101(b)(4)(iii)(D) of the Tax Law.
Petitioner, Binghamton Burial Vault Co., Inc., will enter into a transaction in which the assets
of Binghamton Precast & Supply, a division of Petitioner, will be transferred to a newly created
corporation. In exchange for the assets, Petitioner will receive the stock of the new corporation.
Petitioner will then distribute the new corporation's stock pro-rata to all of Petitioner's stockholders.
Section 1101(b)(4) of the Tax Law states, in part:
(iii)

The term retail sales does not include:
(D)

The transfer of property to a corporation upon its organization in
consideration for the issuance of its stock.

Section 526.6(d) of the New York State Sales and Use Tax Regulations states, in part:
(d)

Exclusions relating to corporate and partnership transactions.

(1)

The following transfers of property are not retail sales:
(iv)

(5)

The transfer of property to a
corporation upon its organization in
consideration for the issuance of its
stock.

*
*
*
Transfers of property to a corporation upon its organization.
(i)

The transfer of property to a corporation upon its organization, in
consideration for issuance of its stock, is not a retail sale.

(ii)

Corporate existence is deemed to begin upon the filing of the
certificate of incorporation with the Secretary of State. Only transfers
made at the time of the commencement of the corporate business, or

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Sales Tax
January 31, 1989
within a reasonable time thereafter, while the corporation is still in
the process of organizing its business, are eligible for the exclusion.
(iii)

Transfers made to a dormant corporation, which is being activated,
are not eligible for the exclusion.

Example 4:

A corporation filed a certificate of incorporation with the Secretary
of State on February 1, 1974. On March 10, 1976 it is decided that the
corporation is to be activated, and on March 15, 1976 a stockholder
transfers tangible personal property - a truck - to the corporation, in
consideration of the issuance of shares of stock. The transfer is not
excluded from the definition of retail sale, as it was not made upon
the organization of the corporation.

(iv)

Where a transfer of property is made to a corporation upon its
organization in consideration of the issuance of stock, and other
property, the transfer is a sale to the extent of the other consideration.

Example 5:

A contribution of tangible personal property is made to a corporation
upon its organization in consideration of the issuance of $3,000 in
shares of stock and $7,000 in notes. The transfer is a retail sale to the
extent of $7,000.

(v)

Where a transfer of property is made to a corporation upon its
organization in consideration of the issuance of stock, and the
assumption of debts and liabilities representing security interests in
the property transferred, the transfer is eligible for exclusion from the
definition of retail sale.

Accordingly, as Petitioner will receive stock issued by the newly created corporation, the
assets of Petitioner's division, Binghamton Precast & Supply, may be transferred without the
incurrence of a sales tax liability by Petitioner.
It is noted that even though this transaction qualifies for exclusion from sales tax, the transfer
of assets from a corporate division to a newly formed corporation in exchange for the issuance of
the new corporation's stock constitutes a bulk sale. Section 537.1 of the Sales Tax Regulations
defines the term bulk sale as any sale, transfer, or assignment in bulk of any part or the whole of
business assets, other than in the ordinary course of business, by a person required to collect tax and
pay the same over to the Tax Commission.
Inasmuch as Petitioner will be liable for filing a notice of bulk sale with the Department of
Taxation and Finance, Petitioner may wish to contact the Central Office Audit Bureau, Bulk Sales
Unit, Department of Taxation and Finance, W.A. Harriman Campus, Albany, N.Y. 12227 for
assistance in complying with its bulk sales obligations.

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TSB-A-89 (4)S
Sales Tax
January 31, 1989
Accordingly, if Petitioner transfers the assets of its Binghamton Precast & Supply Division
to the newly created corporation upon its organization solely in consideration of the issuance of its
stock, such transfer will not be subject to sales tax. However, if such transfer is in consideration of
the issuance of stock and other property, such transfer will be subject to tax to the extent specified
by regulation section 526.6(d)(5).

DATED: January 31, 1989

s/FRANK J. PUCCIA
Director
Technical Services

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.