Is transferring property to a brand-new, not-yet-capitalized corporation in exchange for 100% of its common and preferred stock a taxable sale under Texas sales tax?

Subject

Contribution To Capital — Transfer Of Assets To A Non-Capitalized New Entity For 100% Common And Preferred Stock — Not Taxable

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9311L1271B01

Plain-English Summary

A taxpayer asked the Comptroller whether transferring property to a non-capitalized corporation, in exchange for 100% of that corporation's common stock and 100% of its redeemable preferred stock, would be a taxable transaction under the sales tax.

The Comptroller answered no, and pointed back to an earlier letter it had issued on September 27, 1991, which held that transferring property to a non-capitalized corporation in exchange for 100% of the corporation's stock is not taxable. The letter explains that splitting the stock received into two classes — part common stock and part redeemable preferred stock — does not change that 1991 answer. The reasoning given is the same in both cases: because 100% of the corporation's stock is being transferred to the property owner, and the corporation is not yet capitalized at the time of the transfer, the transaction is not taxable.

A closing note on the letter references "Previous Accession Number 9311080L.2 and/or 9311080L," indicating this letter is linked to or supersedes an earlier-numbered version of the same ruling.

What This Means For You

If you're forming a new corporation and funding it with a contribution of property: According to this letter, receiving 100% of a brand-new corporation's stock (common and/or preferred) in exchange for contributing property to it is not treated as a taxable sale, as long as the corporation is not yet capitalized when the transfer happens and you receive all of its stock.

If your stock consideration is split between common and preferred shares: This letter specifically confirms that dividing the stock received into common and redeemable preferred classes does not change the non-taxable treatment, so long as the transferring party still ends up with 100% of both classes.

Note on scope: This letter does not cite any statute, rule, or case, and does not explain what "capitalized" means in this context beyond distinguishing it from the initial, non-capitalized state of a newly formed corporation. It also does not address what happens if less than 100% of the stock is received, or if the corporation already has some capitalization at the time of transfer.

Q&A

Q: Is transferring property to a new corporation in exchange for all of its stock a taxable sale in Texas?
A: According to this letter, no — as long as the corporation is not capitalized at the time of the transfer and the transferor receives 100% of the corporation's stock.

Q: Does it matter if the stock received is split between common stock and preferred stock?
A: No. The letter states that the fact that part of the transfer is common stock and part is redeemable preferred stock does not change the answer, because 100% of the stock is still being transferred.

Q: Was this a new position from the Comptroller, or a restatement of a prior ruling?
A: It's a restatement. The letter refers back to a September 27, 1991 letter with the same underlying holding — that a transfer of property to a non-capitalized corporation for 100% of its stock is not taxable — and confirms that the common/preferred stock split doesn't change that answer.

Original ruling text

November 19,1993

Dear **:

Recently you asked if the transfer of property to a non-capitalized
corporation in exchange for 100% of the common stock and 100%
of the redeemable preferred stock of the corporation would be a
taxable transaction under the sales tax.

On September 27, 1991, I issued a letter stating that the transfer of
property to a non capitalized corporation in exchange for 100% of the
stock of the corporation would not be taxable. The fact that part of
the transfer here is common stock and part is preferred stock does not
change my answer in 1991. In this case, as in the case in 1991, 100%
of the stock of this corporation is being transferred; and this
transfer is not taxable because the corporation at the time of
transfer is not capitalized.

I hope this satisfactorily answers your inquiry.

Sincerely,

Wade Anderson
Assistant Director
Tax Administration

NOTE: Previous Accession Number 9311080L.2 and/or 9311080L