IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA In re CIRCLE W. RANCH,                                                                     No. 92-13256      Debtor. ___________________________/ CIRCLE W. RANCH,      Plaintiff,     v.                                                                                                  A.P. No. 93-1029 STATE OF CALIFORNIA,      Defendant. ______________________________/ Memorandum of Decision      In 1988, debtor Circle W. Ranch deeded its real property at 280 Leveroni Road, Sonoma, California, to one James Mitchell. Although the form of the deed was an absolute transfer, the evidence establishes clearly that Circle W and Mitchell intended the transaction between themselves to be a security transaction, with Circle W retaining the right to regain title. Circle W retained possession of the property, and made all debt service, insurance, property tax, and other payments associated with the property.      This adversary proceeding is over $75,000.00 in capital gains tax which the State of California claims is due on account of the sale to Mitchell. The state argues that even if the parties intended the transfer to Mitchell to be for security purposes, it must be treated as an outright sale for tax purposes.      Pursuant to California Revenue and Taxation Code section 18031, gain or loss on the the disposition of property is to be determined in accordance with federal tax law. In Helvering v. F. & R. Lazarus Co., 308 U.S. 252 (1939), the Supreme Court held that the substance of the transaction, not its form, determines if there has been a sale for tax purposes. See also Patton v. Jonas, 249 F.2d 375 (7th Cir. 1957). As the tax court noted in Vickers v. Commissioner, 36 TCM 391 (1977):
         A primary factor governing whether a transaction is          a sale or a security arrangement is the parties' in-          tentions, gathered from the instruments themselves          and from the attending facts and circumstances.      In this case, the attending facts and circumstances show that neither party intended a sale. The only case cited by the state, Munger v. Moore, 11 Cal.App.3d 1 (1970), is not a tax case and does not seem relevant to taxation situations. The cases cited above make it clear that a taxing authority does not have the rights of an innocent purchaser, and is bound by the substance of the transaction.      Accordingly, judgment shall be entered in favor of Circle W declaring that the 1988 transaction was not a sale in substance and, accordingly, no taxes are due on account of it. Any tax lien based on that transaction will be declared void. Circle W shall recover its costs of suit.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for plaintiff shall submit an appropriate form of judgment forthwith.
Dated: January 28, 1994                                                                                                   _______________________                                                                                                                                                    Alan Jaroslovsky                                                                                                                                                    U.S. Bankruptcy