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I live in California. My wife and I own a 2005 Toyota Prius,

free and clear as private...
I live in California. My wife and I own a 2005 Toyota Prius, free and clear as private individuals. I want to sell it to my corporation. It is a California C Corp, all shares are owned by my wife and myself. It is a "real" corporation, not a shell; we run a temp staffing business with several dozen employees and $1M+ sales. I cannot find this specific situation on the CA DMV website, so am wondering about the procedure. More specifically, will it require payment of Use Tax through the DMV (transfer from family member to family member is exempt, for instance)? Any other "gotcha's" from a tax perspective (State, Fed, DMV)? What forms (or website) do I need? Thanks!
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Answered in 16 minutes by:
10/21/2013
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,132
Experience: Taxes, Immigration, Labor Relations
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Lev :

Hi and welcome to our site!
The corporation is a separate legal entity. That is regardless if you are a shareholder.
If the car is sold to that C-corporation - the sale transaction is subject of sales (use) tax.
If the car is contributed to the C-corporation in exchange for shares - there is no sales (use) tax.

Lev :

See here - http://www.boe.ca.gov/sutax/faqex.htm#3f
f.Transfers Into and Out of Corporations
A transfer of property transferred into a commencing corporation solely in exchange for first issue stock is not subject to tax. The corporation must acknowledge receipt of the property and verify that the only consideration given is stock in the company. If the corporation assumes any liabilities as consideration for the transfer, tax will apply to the transfer. If a corporation gives property, such as a depreciated vehicle, to an employee as payment of wages or compensatory bonus and a W-2 form, Statement of Wages Earned, is required to be issued, tax would apply on the monetary value given to the property in lieu of cash. If the transfer is a gift, no use tax would apply.


To qualify, a copy of the Articles of Incorporation and Minutes of the Meeting of the Corporation detailing the transfer is required. When a corporation is dissolved and distributes assets to stockholders, no tax applies, provided the assets are distributed in accordance with the stockholders' ownership in the corporation and the assets were not inventory being held for resale. A copy of the Certificate of Election to Wind Up and Dissolve describing the disbursement of the corporate assets is required to support an exemption.

Customer:

Thanks, XXXXX XXXXX makes sense, but in the second example, how would it work? My wife and I already own all the stock in the corp. If we transfer stock from the corp to ourselves, nothing actually happens--we could create additional stock, but I don't see any difference; whether we own 100% of 100 shares of stock or 100% of 110 shares of stock, our ownership position remains unchanged.

Customer:

Suppose we leased the vehicle to the corp, perhaps for a long time? The underlying play here is that we have an IRS levy on personal assets, but not on corp. We just paid off the car, so no longer have a lienholder. We are concerned the IRS will learn this, decide to do something about it. The car is too old/high mileage to get a loan against, except perhaps from family. Is that a viable option? Under no circumstances do I want to endanger the corp

Lev :

That is correct - from ownership prospective - there will not be any difference.
But in this case a contribution of the car to the corporation will be a contribution of the capital - so your stock basis will increase by the fair market value of the car of your basis in that car - whatever is less.
In addition - as mentioned above - such transfer will not be subject of sales)use) tax.
If you simply sell the car - your basis will not be affected and there will be use tax due on the title.

Customer:

Ah, then it makes sense. From the DMV's point of view, however, what does this look like, a gift, from my wife and I to the corp? Aren't gifts subject to (imputed value) use tax?

Lev :

There is no "gifts" to the corporation which you own.
That is like taking from one pocket and putting into another pocket - there is no gifts to yourself...
On another hand - gifts are not taxable income for recipients - regardless of the value.

Customer:

I think I understand. It sounds like no paperwork at the DMV is needed then? I'm thinking about the IRS; I want them to know that the car is no longer a personal asset, should they check

Lev :

There is no need to report to the IRS when the car is transferred to business entity as capital contribution - that disposition is not treated as the sale - and doesn't create any income tax liability.

Customer:

Understood. What paperwork is needed by the state department of motor vehicles? Who is the legal registered owner?

Lev :

As mentioned above
-- The corporation must acknowledge receipt of the property and verify that the only consideration given is stock in the company - a copy of the Articles of Incorporation and Minutes of the Meeting of the Corporation detailing the transfer is required.

Lev :

That will allow to avoid sales tax requirement on the new title.

Customer:

I'm sorry to be so thick this morning. :-) So to walk it through; hold a meeting, take minutes of that meeting and articles of Incorporation to the DMV, then transfer ownership of the car from my wife and I to the corp entity, which then becomes the legal owner of the vehicle, correct?

Lev :

Yes - that is correct. You will also sign over the title and there should be an application for registration form and some registration fees. That all you need .
The Articles of Incorporation and Minutes of the Meeting are needed to avoid sales tax charge.

Customer:

Whew! OK, one additional detail please; you said, "... contribution of the car to the corporation will be a contribution of the capital - so your stock basis will increase by the fair market value of the car of your basis in that car - whatever is less." Not sure what "basis in that car" refers to. My wife and I own it free and clear. I can establish market value from Kelly Blue Book. Not sure how "basis" applies?

Lev :

The basis for the property you purchased - is your purchase price.
The basis must be adjusted for some items.
For instance
- improvements are added to the basis.
- If the car was used for business purposes and deductions were claimed - the depreciation portion should decrease the basis.

Customer:

Ah, OK. I use the same CPA to prepare both corp and personal taxes, so she should be able to determine that. I believe I finally understand. Thank you so much for your help!

Lev :

You are more than welcome.
I hope you will be back if any clarification needed.

Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,132
Experience: Taxes, Immigration, Labor Relations
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