PACIFIC PIPELINE CONSTRUCTION COMPANY v. STATE BOARD OF EQUALIZATION

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District Court of Appeal, Second District, Division 1, California.

PACIFIC PIPELINE CONSTRUCTION COMPANY, a corporation, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION of the State of California, Defendant and Appellant.

Civ. 21789.

Decided: April 16, 1957

Edmund G. Brown, Atty. Gen., James E. Sabine, Asst. Atty. Gen., Dan Kaufmann, James C. Maupin, Deputy Attys. Gen., for appellant. Thomas A. Wood and Larwill & Wolfe, Los Angeles, for respondent.

Defendant Board of Equalization appeals from a judgment that it ‘pay to plaintiff, Pacific Pipeline Construction Company, the principal sum of $6,491.78 together with interest’, etc. The judgment was rendered in an action by which plaintiff sought to have refunded to it a certain sales tax, interest and penalties paid under protest.

The parties agree that, although other issues were tried in the action, the sole question to be decided on this appeal is whether the transfer by plaintiff corporation on March 14, 1949, to Pacific Pipeline & Engineers, Ltd., a corporation, of machinery and equipment valued in excess of $200,000 was subject to sales tax. The crux of the question, however, is whether the sale made by plaintiff was within the exemption granted by Section 6367 and defined by Section 6006.5 of the Revenue and Taxation Code—the occasional sale exemption.

Upon substantial evidence, the court found:

‘That prior to February 24, 1949, plaintiff and another corporation, Engineers, Ltd., jointly owned another California Corporation, Pacific Pipeline and Engineers, Ltd. That prior to February 24, 1949, Pacific Pipeline and Engineers, Ltd., a California corporation was engaged in the pipeline construction business.

‘That on February 24, 1949, G. W. Abernathy, Roy Price, Alfred B. Swinerton and Richard Walberg entered into an agreement whereby they effected, or provided for, a reorganization of the Pacific Pipeline and Engineers, Ltd., and of the plaintiff and for a territorial division of ‘pipeline business' between said corporations. Reference is made to Plaintiff's Exhibit 15, being a copy of said agreement, for the details thereof. That in pursuance of said agreement and to carry out the proposed plan of reorganization and division of business, said Pacific Pipeline and Engineers, Ltd., and the plaintiff, on March 12, 1949, entered into an agreement for the exchange of certain properties. That under said agreement the plaintiff transferred to said other corporation certain equipment, being personal property, thereafter valued by defendant at $201,230.50, and in return for a valuable consideration consisting of certain property transferred to plaintiff by said other corporation. For the details of said exchange agreement, reference is made to plaintiff's Exhibit 16, being a copy thereof.

‘* * * That said transfer of property, as provided for in said exchange agreement, was not a sale of property at retail such as is contemplated by and referred to in Section 6051 of The Revenue and Taxation Code, but was an occasional sale within the meaning of that term as used in Sections 6367 and 6006.5 of the Revenue and Taxation Code, and as contemplated by the pertinent law of California.

‘* * * The distribution of said machinery and equipment was not a taxable transaction and the said tax thereon was unlawful, invalid and paid under protest by plaintiff.’

Appellant relies upon the facts that a large part of respondent's business—the wrapping and coating of new pipe in its yard—was subject to sales tax; that respondent was a retailer licensed by appellant to make sales; that respondent regularly reported and paid taxes, except upon the other items involved in the instant action, as to all of which judgment was in favor of appellant; and that respondent had sold some other used equipment to other buyers during the preceding years.

Appellant also relies upon the construction of Section 6051 of the Revenue and Taxation Code by the following decisions: Bigsby v. Johnson, 1941, 18 Cal.2d 860, 118 P.2d 289; Northwestern Pacific R. Co. v. State Board of Equalization, 1943, 21 Cal.2d 524, 133 P.2d 400; Los Angeles City High School District v. State Board of Equalization, 1945, 71 Cal.App.2d 486, 163 P.2d 45; Market Street R. Co. v. California State Board of Equalization, 137 Cal.App.2d 87, 290 P.2d 20 (decided in 1955, involving a sale made in 1944); and Sutter Packing Co. v. State Board of Equalization, 1956, 139 Cal.App.2d 889, 294 P.2d 1083.

Bigsby v. Johnson, 18 Cal.2d 860, 118 P.2d 289, 290, involved a $25 sale of used equipment by a printing establishment. Plaintiff there urged that, since the sale ‘was merely incidental to his principal business and was made in order to salvage the investment upon machinery that he could not longer use, it was not the kind of sale that the legislature intended to tax’. The Supreme Court, in 1941, 18 Cal.2d at page 863, 118 P.2d at page 291, held that ‘our statute creates no exemption covering the situation’.

Northwestern Pacific R. Co. v. State Board of Equalization, 21 Cal.2d 524, 133 P.2d 400, involved two sales of rolling stock for the aggregate price of about $80,000, one sale to plaintiff's parent company, Southern Pacific Railroad, and the other to Pacific Motor Trucking Company, another corporation owned and operated by Southern Pacific. It had long been the practice of these corporations to transfer surplus and retired rolling stock or operating equipment from one company to another at its depreciated value. Judgment for the refund of the tax to the plaintiff was reversed with directions. The court, in 1943, 21 Cal.2d at page 528, 133 P.2d at page 402, said:

‘This case is not distinguishable from Bigsby v. Johnson, 18 Cal.2d 860, 118 P.2d 289 * * *

‘* * * While for reasons considered desirable plaintiff corporation may departmentalize its business, it cannot by such process set up for tax purposes a distinction between the types or kinds of sales made by it where the effect would be to cause some of its sales to escape the tax aimed at all of such sales.’ (Emphasis added.)

At page 529, of 21 Cal.2d, at page 403 of 133 P.2d: ‘Such transfers, and others of a similar nature to follow, may not be regarded as casual or isolated sales. They were ‘retail sales' within the meaning of the act in the they entailed the transfer of ‘title or possession’ to a consumer for a ‘purpose other than for resale.’ * * *'

And, in said Northwestern Pacific R. Co. decision, supra [21 Cal.2d at page 531, 133 P.2d at page 404], the following language is quoted with approval from the decision in Superior Coal Co. v. Department of Finance, 377 Ill. 282, 36 N.E.2d 354: “* * * Ownership of capital stock in one corporation by another does not, itself, create an identity of corporate interest between the two companies, nor render the stockholding company the owner of the property of the other, nor create the relation of principal and agent, representative, or alter geo between the two. United States v. Delaware, L. & W. R. Co., 238 U.S. 516, 35 S.Ct. 873, 59 L.Ed. 1438 * * *.' Nor does the identity of officers of two corporations established identity of the corporations. * * *”

In Los Angeles City High School District v. State Board of Equalization, 71 Cal.App.2d 486, 488, 163 P.2d 45, 46, the judgment against the School District in its action for refund of sales taxes paid under protest on its sale of personal property no longer useful to its was affirmed in 1945 for the reason that the cases of Bigsby v. Johnson, supra, and Northwestern Pacific R. Co. v. State Board of Equalization, supra, ‘are decisive of the issues'.

Market Street R. Co. v. California State Board of Equalization, 137 Cal.App.2d 87, 290 P.2d 20, was an appeal by the Railway from a judgment denying it a refund of sales taxes paid under protest on its sale of its operative properties to the City of San Francisco. The transfer was made September 29, 1944. At page 97 of 137 Cal.App., at page 26 of 290 P.2d, the court said:

‘The main thesis of Market is that liquidation sales were never intended to be within the scope of the act—that the sales tax is imposed on the privilege of engaging in business, not on the privilege of going out of business.

‘The answer to this problem must be sought in the terms of the statute. Exemptions from taxation must be found in the statute. It is not for the courts to say that, although the statute applies to all sales of tangible personal property by a retailer, not sold for resale by the buyer, the statute does not apply to this sale by a retailer because of some undisclosed general ‘intent’. [Emphasis added.]

‘In the instant case, the statute, as it read in 1944, clearly applied to the sale to the City of that portion of the operating assets consisting of tangible personal property.’

Effective since June 19, 1947, Section 6367 of the Revenue and Taxation Code, provides: ‘There are exempted from the taxes imposed by this part the gross receipts from occasional sales of tangible personal property * * *’. (Emphasis added.) On the same date, Section 6006.5 became effective. It provides:

“Occasional sale' includes:

‘(a) A sale of property not held or used by a seller in the course of an activity for which he is required to hold a seller's permit, provided such sale is not one of a series of sales sufficient in number, scope and character to constitute an activity requiring the holding of a seller's permit;

‘(b) Any transfer of all or substantially all the property held or used by a person in the course of such an activity when after such transfer the real or ultimate ownership of such property is substantially similar to that which existed before such transfer. For the purposes of this section, stockholders, bondholders, partners, or other persons holding an interest in a corporation or other entity are regarded as having the ‘real or ultimate ownership’ of the property of such corporation or other entity.'

Sutter Packing Co. v. State Board of Equalization, supra, is the only decision cited by appellant which considered a transfer made after the effective date of said Sections 6367 and 6006.5 of the Revenue and Taxation Code. It was an action seeking refund of sales tax paid under protest on a sale made June 1, 1949 of all of plaintiff's furniture, fixtures, machinery and other equipment to a single non-affiliated purchaser for the price of $700,000. Judgment for defendant was affirmed on appeal by the District Court of Appeal and a hearing was denied by the Supreme Court. Mr. Justice Kaufman, speaking for the court 139 Cal.App.2d at page 894, 294 P.2d at page 1087, said: ‘* * * In the instant case the property was sold to a stranger, hence this exemption [Revenue & Taxation Code, Sec. 6006.5, sub. (b).] does not apply.

‘Subsection (a) of Section 6006.5 provides that an occasional sale includes ‘a sale of property not held or used by a seller in the course of an activity for which he is required to hold a seller's permit, provided such sale is not one of a series of sales sufficient in number, scope and character to constitute an activity requiring the holding of a seller's permit.’ The machinery and equipment which was sold, appellant says, had been used in the food processing business, an activity for which a seller's permit was not required. Rev. & Tax.Code, Sec. 6359. Appellant maintains that the second condition of section 6006.5 [subdivision] (a), has also been met, anmely, that this sale was not one of a series of sales sufficient in number, scope and character to constitute an activity requiring a seller's permit.

‘Whether or not the retail sale made here can be considered exempt from the tax, depends finally upon the interpretation of the language ‘one of a series of sales sufficient in number, scope and character to constitute an activity requiring * * * a seller's permit.’ The sales prior to the sale here in question undoubtedly required such a permit. * * * There appears to be nothing, however, inherently different in the nature of the items sold in the final sale than in the earlier sales of used equipment * * *. Appellant says that this was truly an occasional sale since the sale of the entire assets could happen only once. However, the same may be said for each smaller item sold. Similar sales might be made, and appellant herein had, in fact, made a similar sale of all of its equipment and machinery in the plant in 1945.'

While the Sutter Packing Co. decision, supra, was made in 1956, the action involved a transfer made in 1949. The transfer now engaging our attention was also made in 1949, before Section 6019 of the Revenue and Taxation Code was enacted, limiting to two the number of casual or occasional sales that would be exempt during any twelve-month period.

Plaintiff's (respondent's) Exhibit 13 is a list of sales of used equipment (other than the transfer here being considered), which were made by plaintiff from 1947 to 1950. Such sales include about 50 motor vehicles, 3 trailers, 4 generators, 2 tar pots, 2 cranes, a steam cleaner, a compressor, and a dynometer. A number of each of the above items is also included in the $200,000 transfer which gave rise to the instant appeal. Those other sales include two sales in October and November 1948 and two in April 1949. The transaction here being considered took place March 14, 1949 and was well within the same twelve-month period as those four other sales.

As in the Sutter Packing Co. case, supra, and Northwestern Pacific R. case, supra, the transfer involved in the instant appeal was “one of a series of sales sufficient in number, scope and character to constitute an activity requiring a seller's permit”. Therefore, the transaction is not exempt from tax under the provisions of Section 6006.5(a) of the Revenue and Taxation Code.

No case has been cited by either party to the instant appeal and our research has discovered none wherein subsection (b) of Section 6006.5 of said code has been considered. In order that a transfer may be exempted from sales tax under said subsection, the requirements are: (1) that the transfer include ‘all or substantially all of the property held or used’ by the transferror in the course of an activity for which he is not required to hold a seller's permit; and (2) that ‘after such transfer the real or ultimate ownership of such property is substantially similar to that which existed before such transfer’. There is some testimony in the record on the instant appeal that would support a finding that the real or ultimate ownership was substantially similar after said transfer.

Respondent's allegations and proof and the court's finding in respect to the portion of respondent's assets involved in the transfer is that the transfer was an exchange of ‘certain properties', and ‘certain equipment’. The respondent's allegations and proofs are that ‘plaintiff, at all times herein mentioned was, and now is, engaged in the business of coating and reconditioning of pipe and installation and maintenance of pipelines'. The court found ‘that at all of said times mentioned, plaintiff was engaged in the business of receiving, unloading, and storing pipe and of roto-blasting, wrapping, coating and reconditioning pipe, and the installation and maintenance of pipe lines'.

While the court found that the agreement between certain individuals effected ‘a reorganization of the Pacific Pipeline and Engineers, Ltd., and of the plaintiff and for a territorial division of ‘pipeline business' between said corporations' (emphasis added), and that the transfer involved in the instant appeal was made to carry out said agreement, it also found that ‘plaintiff transferred * * * certain equipment, being personal property, thereafter valued by defendant at $201,230.50’. The record on this appeal contains no finding or evidence that the plaintiff transferror actually liquidated any part of its business, or that the transfer involved ‘all or substantially all’ of the property held or used by it in connection with any ‘activity’. Said transfer was not exempt from sales tax under the provisions of Section 6006.5(b) of the Revenue and Taxation Code.

Judgment is reversed.

WHITE, Presiding Justice.

DORAN and FOURT, JJ., and concur.

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