When a corporation transfers its assets to a new company in exchange for less than 100% of that new company's stock, is the transfer taxable in Texas?

Subject

Transfer Of Assets To A New Corporation In Exchange For Less Than 100% Of Its Stock

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1274G05

Plain-English Summary

Three related Texas corporations — "A" (a well servicing company), "C" (an oil field equipment fabricator), and "D" (a leasing and rack-testing/thread-cleaning business) — were each owned in different proportions by the same individual ("Mr. X"), plus trusts and another individual ("Mr. Z"). The plan was for A, C, and D to each transfer all of their assets and liabilities to a brand-new Delaware corporation, "COMPANY B," in exchange for COMPANY B stock. COMPANY B would issue all of its capital stock to A, C, and D collectively — not any one of them alone. Afterward, "COMPANY A" (an unrelated well-servicing company considering acquiring an interest) would buy the COMPANY B stock from A, C, and D for cash at fair market value, making COMPANY B a wholly owned subsidiary of COMPANY A. A would then liquidate, C would dissolve, and D would continue only its service (non-leasing) operations.

On the central question — whether the transfer of equipment, furniture, and fixtures from A, C, and D to COMPANY B counted as a tax-free transfer since "no sale or purchase" occurred — the Comptroller ruled these transfers are sales. The letter explains why by contrasting two prior rulings the taxpayer had cited: in microfiche 9109L1132F03, the transferee received 100% of the stock of a non-capitalized corporation in exchange for the transferred assets (a tax-free transfer), while in microfiche 9202L1162D10, a transfer of assets as a contribution to capital for less than 100% of the stock was treated as consideration. Because in this case no single transferee (A, C, or D) would receive 100% of COMPANY B's stock, the Comptroller applied the reasoning of 9202L1162D10 and held that the transfers of assets from A, C, and D, each receiving less than 100% of COMPANY B's stock, are sales. The letter notes, however, that these sales may qualify as occasional sales under Tax Code Section 151.304(b)(2). It also flags a wrinkle for D specifically: if any of the tangible personal property D transferred was originally purchased for resale, and its cost exceeds the taxable lease/rental receipts already collected on that property, D must include the difference between its cost and the rental receipts on its sales tax return.

The ruling treats motor vehicles differently from other tangible personal property. The transfer of automobiles and pickup trucks from A, C, and D to COMPANY B, in exchange for no consideration other than stock, was found not to be a taxable transaction. Likewise, neither motor vehicle tax nor interstate motor carrier tax applies to the transfer of the truck-tractors and trailers. On the remaining questions, the Comptroller confirmed that COMPANY A's later purchase of COMPANY B's capital stock (for cash, at fair market value) from A, C, and D is not subject to Texas sales and use tax, and does not generate any sales, use, motor vehicle, or interstate motor carrier tax. Finally, the letter addresses a variant scenario where a second new corporation ("COMPANY C") would instead acquire COMPANY B's stock and then COMPANY B would be liquidated into COMPANY C — the Comptroller stated that this stock acquisition and subsequent liquidation would not adversely impact any prior tax-free transfers.

What This Means For You

If you are consolidating multiple related businesses into a new holding entity: Whether an asset-for-stock transfer is tax-free hinges on whether a single transferor ends up owning 100% of the new entity's stock. Under this letter's reasoning, if several contributors each receive less than 100% of the new corporation's stock, the Comptroller treats the transfer of tangible personal property as a sale — even though it's part of a larger reorganization.

Occasional sale relief may still apply: Even where the Comptroller finds a "sale," the letter notes these particular transfers may qualify for the occasional sale exemption under Section 151.304(b)(2). Businesses in a similar restructuring should evaluate whether their transaction meets that exemption's requirements.

Watch for resale-property "clawback" on lease/rental equipment: If a contributing company had purchased equipment for resale (rather than for its own use) and had been renting it out, the letter shows the Comptroller will look at whether the cost of that property exceeds the taxable rental receipts already collected — and require the difference to be reported on the transferring company's sales tax return.

Vehicles are treated more favorably: Automobiles, pickup trucks, truck-tractors, and trailers transferred solely in exchange for stock were found not taxable — a materially different result from the equipment/furniture/fixtures analysis in the same transaction.

Stock purchases and subsequent liquidations were not taxed: The later cash purchase of the new corporation's stock, and even a follow-on liquidation of that corporation into yet another new corporation, did not create sales, use, motor vehicle, or interstate motor carrier tax exposure in this ruling.

Q&A

Q: Is a transfer of business equipment to a new corporation in exchange for stock automatically tax-free in Texas?
A: Not according to this letter. The Comptroller held that when multiple companies (A, C, and D) each transferred assets to a new corporation (COMPANY B) and none of them received 100% of COMPANY B's stock, the transfers of equipment, furniture, and fixtures were sales, not tax-free transfers.

Q: What distinguishes a tax-free stock-for-assets transfer from a taxable one, according to this letter?
A: The letter draws the line based on prior rulings it cites: in microfiche 9109L1132F03, the transferee received 100% of the stock of a non-capitalized corporation for the assets transferred (tax-free), whereas in microfiche 9202L1162D10, a transfer for less than 100% of the stock was treated as consideration (a sale). Here, since no single transferee received 100% of COMPANY B's stock, the transfers were sales.

Q: Can these asset transfers still avoid tax under an exemption?
A: The letter states the sales "may qualify as occasional sales under 151.304(b)(2)," meaning the occasional sale exemption is available as a potential basis for nontaxability even though the transfers are sales.

Q: Are the automobiles, pickup trucks, truck-tractors, and trailers transferred to COMPANY B taxed the same way as the equipment?
A: No. The letter separately concluded that the transfer of automobiles and pickup trucks in exchange for stock only "is not a taxable transaction," and that "neither motor vehicle nor interstate motor carrier tax will apply to the transfer of truck-tractors and trailers."

Q: Does COMPANY A's later purchase of COMPANY B's stock, or a subsequent liquidation of COMPANY B into another new corporation, trigger tax?
A: No. The letter states the stock purchase "will not generate ... sales or use tax, motor vehicle or interstate motor carrier tax," and that the acquisition of stock and subsequent liquidation of COMPANY B into COMPANY C "will not adversely impact any prior tax free transfers."

Original ruling text

October 14, 1993

Dear **:

Thank you for your recent letter asking for a letter ruling on the transaction
restated below.

FACTS: ** ("COMPANY A") is a well servicing company which provides
skilled personnel, specialized technology, products and equipment to the oil
and gas industry.

A Inc. ("A") is a Texas corporation duly licensed and authorized to conduct
business within Texas. "A" is engaged in the well service business specializing
in acidizing, fracturing oil and gas wells, and coil tubing applications.
Currently, "A" is 80% owned by an individual ("Mr. X") and the remaining 20% is
owned by two trusts ("Trust"). Its assets consist of land, buildings,
equipment, furniture and fixtures, truck-tractors, trailers, automobiles,
pickup trucks, and chemical inventory which is utilized in providing its
services. All truck-tractors and trailers are registered under the
International Registration Plan and will travel in more than one state. The
automobiles and pickup trucks travel is limited to only intrastate travel.

C Inc. ("C") is a Texas corporation duly licensed and authorized to conduct
business within Texas. "C" is engaged in the oil field equipment fabrication
business in Texas. "C" is 54% owned by Mr. X and 46% owned by Mr. Z. Its assets
consist of parts inventory which is used to refurbish motors and manifolds in
frac equipment for unrelated third parties, equipment, automobiles, and other
personal property (i.e. equipment used for off-highway use only).

D Inc. ("D") is a Texas corporation duly licensed and authorized to conduct
business within Texas. "D" is engaged in the leasing business and also operates
a separate business which performs rack testing and thread cleaning. "D" leases
land, buildings, and rents tangible personal property in Texas to "A." "D" is
100 owned by Mr. X.

"COMPANY A" is contemplating acquiring the assets and/or acquiring an interest
in the above mentioned companies. A, C, and D will transfer all of their assets
and liabilities to a newly established legal entity, COMPANY B (a Delaware
corporation). The liabilities consist of long-term debt and accounts payable.
The liabilities are unrelated to the equipment, furniture and fixtures, motor
vehicles, truck-tractors, and trailer. In return for the transfer of the assets
and specific liabilities, COMPANY B will issue all of its capital stock to A,
C, and D. COMPANY B will take over the operations of A, C, and D. Regarding D,
COMPANY B will only take over the assets pertaining to the leasing operations.
COMPANY B will continue to operate in a similar manner as these companies had
done. COMPANY B will not operate as a leasing business similar to D.

Since D's leasing business involves leasing real property and equipment to A,
the leasing operations will no longer be necessary.

After the transfer to COMPANY B, A will be liquidated and will discontinue
operations. C will discontinue operations and be dissolved. D will continue its
service aspect of its operations but will cease the leasing aspect.

Subsequent to the issuance of capital stock by COMPANY B, COMPANY A will
purchase the COMPANY B stock from A, C, and D based on its fair market value.
COMPANY A will purchase the COMPANY B capital stock for cash. As a result of
this transaction, COMPANY B will become a 100% owned subsidiary of COMPANY A

Question 1: Will the transfer of the equipment, furniture and fixtures from A,
C, and D to COMPANY B in exchange of the COMPANY B capital stock qualify as a
tax free transfer since no sale or purchase has occurred for Texas sales and
use tax purposes?

Response: The transfers of the equipment, furniture, and fixtures from A, C,
and D to COMPANY B in exchange for COMPANY B's capital stock are sales. These
transactions are not similar to the transaction in microfiche no. 9109L1132F03,
nor in microfiche 9202L1162D10, that you refer to. Microfiche 9109L113F03
addressed one transaction whereby the transferee received 100% of the stock
from a non-capitalized corporation in exchange for assets transferred to the
new corporation. Microfiche 9202L1162D10 which concerned the transfer of assets
as a contribution to capital opined that a transfer for less than 100% of the
stock would be consideration.

In the multiple transactions at hand, no one transferee (A, C or D) will
receive 100% of COMPANY B's stock. Therefore, following microfiche
9202L1162D10, the transfers of assets from A, C and D, each for less that 100%
of the stock, are sales. However, those I sales may qualify as occasional sales
under 151.304(b)(2). The occasional sale of tangible personal property from D
to COMPANY B has some tax consequences for D if any of the tangible personal
property transferred was purchased for resale and the cost of the property
exceeds the taxable lease or rental receipts of the same property. D would have
to include the difference between its cost of the equipment and the rental
receipts in its sales tax return.

Question 2: Will the transfer of the automobiles and pickup trucks from A, C,
and D to COMPANY B in exchange of the COMPANY B capital stock qualify as a tax
free transfer since no sale or purchase has occurred for Texas motor vehicle
sales and use tax purposes?

Response: The transfer of the motor vehicles from A, C, and D to the newly
formed COMPANY B in exchange for no consideration other than stock is not a
taxable transaction.

Question 3: Will the transfer of the truck-tractor and trailers from A, C, and
D to COMPANY B in exchange for the COMPANY B capital stock qualify as a
tax-free transfer since no sale or purchase has occurred for Texas interstate
motor carrier sales and use tax purposes or for Texas motor vehicle sales tax
purposes?

Response: Neither motor vehicle nor interstate motor carrier tax will apply to
the transfer of truck-tractors and trailers.

Question 4: As stated in the facts above, COMPANY A will purchase the capital
stock of COMPANY B from A, C, and D based on its fair market value. In this
case, will this purchase of COMPANY B capital stock be subject to Texas sales
and use taxes?

Response: No.

Question 5: If it is concluded that a tax-free transfer exists, will the
purchase of the COMPANY B capital stock by COMPANY A trigger any sales and use,
motor vehicle sales and use, or any interstate motor carrier sales and uses
taxes?

Response: The purchase of stock will not generate Limited sales or use tax,
motor vehicle or interstate motor carrier tax.

Question 6; Assuming a second newly formed corporation is established. This new
corporation (COMPANY C) will acquire the capital stock of COMPANY B instead of
COMPANY A After purchasing the capital stock from A, C, and D, at its fair
market value, COMPANY B will be liquidated into COMPANY C. If it is determined
that a tax-free transfer exist between A, C, and D, and COMPANY B, will the
subsequent liquidation of COMPANY B into COMPANY C adversely impact any prior
tax-free transfers?

Response: The acquisition of stock and subsequent liquidation of COMPANY B into
COMPANY C will not adversely impact any prior tax free transfers.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change. If you have any questions or need more
information, you may call me toll free at 1-800-531-5441, extension 3-4675. The
regular number is 512/463-4675. You may also write to the Tax Administration
Division.

Sincerely,

Tom Soto
Tax Administration Division