How long did a withdrawing service-station partner remain liable after the partners tried to end the business relationship?

Plain-English summary

California Appeals staff recommended limiting a withdrawing service-station partner's liability to operations through May 3, 1986 rather than through the business's November closure.

The partners expressed a desire to end the business by March 31, but initially accepted continued operation while negotiating a buyout. The managing partner repudiated the purchase arrangement on May 3, after which the others objected, consulted counsel, and demanded that operations stop.

Appeals concluded that the continued business through May 3 still occurred with the withdrawing partners' acquiescence. Later operations were neither authorized partnership business nor necessary winding up, so they were treated as the managing partner's individual operations. The partner's liability was prorated through May 3.

Common questions

Did liability end on the claimed March 31 dissolution date?

No.

Why did it continue through May 3?

The partners initially allowed continued operations while negotiating the buyout.

Did liability continue until the station closed in November?

No. Appeals treated post-May 3 operations as the managing partner's alone.

Citations and references

• Former California Corporations Code sections 15029 and 15031(2) — partnership dissolution discussed
• Former California Corporations Code sections 15033 and 15035(a) — post-dissolution winding-up authority discussed
• Glassel v. Prentiss (1959) 175 Cal.App.2d 599 — partner authority after dissolution cited
• Official source signature date February 8, 1988; annotation metadata date January 29, 1988 — disclosed mismatch

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/170-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/170-0045.pdf

Original ruling text

STATE OF CALIFORNIA

170.0045

BOARD OF EQUALIZATION
In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law
REDACTED TEXT
Petitioner

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DECISION AND RECOMMENDATION

REDACTED TEXT

The preliminary hearing on the above taxpayer’s petition for determination was held on December 29, 1987, in Sacramento, California. Hearing Officer:

W. E. Burkett

Appearing for Petitioner:

REDACTED TEXT
Attorney

Appearing for the Board:

Robert L. Buntjer
Supervising Tax Auditor
Protested Items

Petitioner has filed a written petition for redetermination dated April 1, 1987. The protested tax liability for the period April 1, 1986 through September 30, 1986 is measured by: Item Non-remittance returns filed For the second and third Quarters of 1986

State, Local
and County

LATC

$470,632

$470,632

Petitioner’s Contention
The partnership was dissolved on March 31, 1986 and petitioner, as partner, should not be held liable for debts incurred by REDACTED TEXT subsequent to this date.

REDACTED TEXT

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February 8, 1988
170.0045

Summary of Petition
This petitioner is one of three separate individuals determined to be liable for a sales tax deficiency incurred in the operation of a service station located at REDACTED TEXT, California. The service station was operated under a seller’s permit issued on 10-1-85 to an individual, REDACTED TEXT, (hereafter REDACTED TEXT). Subsequent investigation disclosed that REDACTD TEXT had entered into a partnership agreement with this petitioner (REDACTED TEXT), REDACTED TEXT, and REDACTED TEXT for the operation of the service station. Under the of the partnership agreement effective September 19, 1985, REDACTED TEXT was to serve as managing partner and operate the station. Each of the above-named individuals were described as non-managing partners whose principal obligation was to invest and pay in capital in the amount of $40,000 each. A dual determination was issued on the basis that each partner was liable for no remittance returns filed for the second and third quarter of 1986. A separate dual determination was issued against each partner for a tax deficiency summarized on a field billing order for the period 10-186 to 11-7-86. The petitioner and each of them do not dispute that the business was actually operated as a partnership. It is submitted, however, that the partnership was actually dissolved in March of 1986 and that the individual partners are not liable for any tax deficiency received after this date. The following chronology of dates and events has been offered by petitioner’s attorney in support of the March 1986 claimed dissolution: Date

Event

mid-1985

REDACTED TEXT solicits REDACTED TEXT, REDACTED TEXT, and
REDACTED TEXT (“Petitioners”) to purchase a gasoline business in a partnership

Sept-85

REDACTED TEXT and Petitioners enter into a Partnership Agreement – Exhibit 1.

Oct-85

REDACTED TEXT, individually, purchases the gas station – Exhibit 2. REDACTED TEXT, individually, applies for Seller’s Permit – Exhibit 3. REDACTED TEXT, individually, applies for federal employer identification number – Exhibit 4. REDACTED TEXT, individually, applies for state unemployment insurance – Exhibit 5. REDACTED TEXT, individually, files a Fictitious Business Name Statement – Exhibit 6.

REDACTED TEXT

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February 8, 1988
170.0045

REDACTED TEXT retains accounting firm and represents that he owns the gas station individually – Exhibit 7. Oct-85 to Dec-85

REDACTED TEXT operates the gas station. He advises all creditors that he owns the station individually – Exhibit 8. REDACTED TEXT files all state and federal tax returns as an individual and not as a partnership.

March-86

Concerned with REDACTED TEXT’s conduct and mounting losses, Petitioners meet with REDACTED TEXT to discuss closing down business or selling it. REDACTED TEXT refuses to close down, but agrees to buy out the partners’ interest effective as of March 31, 1986 – Exhibit 9.

May-86

REDACTED TEXT repudiates his agreement to purchase and refuses to shut down the station – Exhibit 10.

June-86

Petitioners retain legal counsel to oppose REDACTED TEXT and later file suit to rescind the partnership – Exhibits 11 and 12.

Dec-86

REDACTED TEXT informs Board of Equalization, for the first time, that the business was owned by a partnership – Exhibit 13.

It is conceded that dissolution was not effected under the terms of the partnership agreement. Notwithstanding this, it is argued that the parties actually withdrew after receipt of the operating statement for the month of February 1986. In support of this the petitioners’ attorney has submitted a written chronology prepared by REDACTED TEXT of the events leading up to the ultimate withdrawal of the partners (Copy in file). Also submitted was a copy of a letter from petitioners’ attorney to REDACTED TEXT dated July 18, 1986, wherein the partners specifically objected to the continued operation of the business. Petitioners’ representative also presented a host of other documents and applications such as the application for a seller’s permit. All of which were calculated to show and do evidence that REDACTED TEXT intended to conceal the existence of the partnership from the general public and the business community. Petitioners’ attorney also advised REDACTED TEXT failed to keep adequate books and records and violated many other material provisions of the partnership agreement. He indicated that each member of the partnership orally objected to him continuing the operation of the business in April of 1986, while negotiating a sale of the partnership interest of REDACTED TEXT and REDACTED TEXT to REDACTED TEXT and REDACTED TEXT. Although a tentative agreement to sell the interests of these two partners was reached on April 29, 1986 (see summary of REDACTED TEXT, copy in file) this agreement was actually repudiated by REDACTED TEXT by letter dated May 3, 1986, (copy also in file). In this letter REDACTED TEXT indicated that the business was being placed up for sale with a broker. A purchaser was located but the deal was not consummated because the REDACTED TEXT would not approve an assignment of the service station lease. The business ceased operation on or about November 7, 1986.

REDACTED TEXT

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February 8, 1988
170.0045

On February 17, 1987, the partners jointly filed an action against REDACTED TEXT for recession and restitution, money loaned and received etc. An answer has been filed but the matter has not proceeded to trial. REDACTED TEXT did not file a petition for redetermination. Analysis and Conclusions The general rule is that a partner (REDACTED TEXT in this case) has no authority to bind his co-partners to new obligations after dissolution of the partnership (see Glassel v. Prentiss, 175 Cal.App.2d 599). An exception is recognized, however, with respect to any act appropriate to wind up partnership affairs (Cal. Corp. Code 15033, 15035(a)). We are therefore required to determine if a dissolution occurred and if so whether any continued operation was in furtherance of winding up the partnership affairs. California Corporation Code 15029 defines a dissolution of a partnership as “the change in the relationship of the partners caused by any partners ceasing to be associated in the “carrying on as distinguished from the winding up of the business.” It is clear that none of the partners effected a dissolution under the terms of paragraph 18 of the parties agreement because this required that any partner could only withdraw at the end of the fiscal year by giving ninety (90) days written notice of his intention to do so. This was not done. On the other hand, a dissolution may be effected in contravention of the agreement “by the express will of any partner at any time.” (Cal. Corp. Code 15031(2).) Considering the chronology set forth in the memorandum to REDACTED TEXT dated May 3, 1986 prepared by the husband of REDACTED TEXT, we believe it clear that two of the partners, REDACTED TEXT and REDACTED TEXT, had clearly expressed a desire to discontinue the carrying on (as distinguished from winding up) of the partnership business by March 31, 1986. It does appear, however; that the partners were resigned to REDACTED TEXT’s continued operation of the business during the time a sale of their interests was being negotiated to REDACTED TEXT and REDACTED TEXT. It further appears, however, that the parties had not consented to the REDACTED TEXT’s continued operation of the business indefinitely. This is indicated by REDACTED TEXT’s letter of May 3, 1986, which insisted that REDACTED TEXT complete the previously agreed purchase of the partnership interests. There followed a series of telephone discussions, consultations with an attorney, and ultimately a written demand that REDACTED TEXT cease the operation of the business. It seems clear that continued operation of the business was not in the furtherance of the best interests of the partnership because large losses were being incurred each month. Nor was it required in order to wind up the affairs of the partnership. We therefore conclude that any operation conducted after May 3, 1986, were not on behalf of the partnership but on behalf of REDACTED TEXT individually. It follows that the liability of the individual partners extends to May 3, 1986, but not beyond.

REDACTED TEXT

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February 8, 1988
170.0045

Recommendation
It is recommended that the liability of the withdrawing partner be limited to the period 4-1-86 to 5-3-86. If figures are not available to make an adjustment on an actual basis, it should be prorated on the basis of the amount reported on the second quarter 1986 sales tax return. Adjustment is to be initiated by Petition Unit.

W. E. Burkett, Hearing Officer

2-8-88
Date