Tennesee Litigation: Is the transfer of a houseboat to a living trust subject to Tennessee sales tax?

There is lawsuit pending in Davidson County Chancery Court in which an individual transferred a houseboat to a living trust, and the Department of Revenue is attempting to tax the transaction under Tennessee's sales tax. Randall Crotts Living Trust v. Trost, Civil No. 10-2004-I. While possession of the houseboat was transferred to the living trust, the mortgage holder refused to allow a transfer of title to the living trust.

This case highlights two important principles in Tennessee sales and use tax law – (1) the occasional sale exemption and (2) what constitutes a sale under Tennessee’s sales tax law.

  

In Tennessee, the occasional and isolated sale exemption, while generally exempting non-dealer transactions, does not apply to transactions involving motor vehicles, boats, and aircraft. Thus, in this case, the Department contends that the transfer to the living trust is not exempt. The taxpayer really doesn’t challenge this point in its complaint.

The Taxpayer challenges the Department’s assertion that the transfer to the living trust is a sale, focusing on the mortgage holder’s refusal to allow the transfer, but the Taxpayer also concedes in the complaint that the living trust has possession of the houseboat. In Tennessee, transfer of title or possession is considered a sale, so the Department may have the better position on this issue.

As a final contention, the Taxpayer also argues that there is no consideration on which a tax can be assessed. It is unclear from the complaint whether any cash was exchanged from the living trust to the trust settler, but that may be a basis on which the taxpayer could prevail. Stay tuned as this case continues to work its way through the Tennessee court system.

A copy of the case can be viewed here:

http://www.babc.com/files/upload/randall_crotts_living_trust.pdf

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