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Macrodyne Industries, Inc. v. State Board of Equalization … (1987)

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Transfer of Entire Division's Assets and Liabilities to Existing Subsidiaries Is Not a Sale Where Transferor Remains Jointly Liable for Liabilities

The company transferred both the assets and liabilities of three divisions to three of its already existing wholly-owned subsidiaries. It, however, remained jointly liable with the subsidiaries for those liabilities. The Board assessed sales tax on the transfer of assets, and the consideration for the sales was the assumption of the liabilities by the existing subsidiaries.

Taxpayer contended: (a) this was a nontaxable corporate reorganization, and (b) there was no taxable consideration because taxpayer remained jointly liable for the liabilities.

The court of appeal held in favor of the taxpayer, stating that the taxpayer and its subsidiaries were separate entities, and the transfers between them, which constituted sales, would be subject to sales tax. However, the court also held that where the taxpayer remained jointly liable for the indebtedness assumed by the subsidiaries, and the subsidiaries were pre-existing (not commencing) corporations, the taxpayer received no consideration for the transfer of assets, and there was, therefore, no sale. Macrodyne Industries, Inc. v. State Board of Equalization (1987) 192 Cal.App.3d 579 [disapproved in Beatrice Co. v. State Board of Equalization (1993) 6 Cal.4th 767].