IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
CIRCLE W. RANCH, No. 92-13256
CIRCLE W. RANCH,
v. A.P. No. 93-1029
STATE OF CALIFORNIA,
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
, 249 F.2d 375 (7th Cir. 1957). As the tax court noted in Vickers v. Commissioner
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 _______________________