Did equipment keep tax-paid status when one partner withdrew, four joined a new partnership, and that partnership leased the equipment?

Plain-English summary

Original business had two 50-percent partners. July 1, 1974 one withdrew and four entered. PDF says no indication remaining/incoming members had written agreement preventing dissolution—not proof none existed—so counsel treated original partnership ended/new one begun. Request and entity records absent.

Counsel agreed outgoing partner sold tangible-property interest to four incoming people as occasional sale. They contributed acquired property to new partnership solely for partnership ownership interests.

Same day partners agreed form corporation and transfer all non-equipment assets solely for first-issue stock. Equipment retained. Memo first says new partnership leased equipment to corporation August 14, then later says it now proposes lease; no agreement/outcome resolves timing.

Original partnership had presumably paid acquisition tax. Equipment did not keep tax-paid status because transferred to new partnership through ownership interests; rent taxable. Live changes presumed original payment and absence of continuation evidence into definite facts.

New partnership paid tax on 50 percent original-partnership asset book value; counsel called incorrect and directed refund or credit against rent tax. Amount, payment, claim, credit and actual rent absent. Live annotation omits remedy and executed/proposed wording conflict.

Common questions

Why did counsel find new partnership?

One partner withdrew, four entered, and PDF said no indication of written continuation agreement; live states no agreement.

Was outgoing partner's transfer taxable?

The memorandum agreed that the outgoing partner's sale of an interest to the incoming individuals was an occasional sale.

Did that make equipment tax-paid for new partnership?

No. The individuals contributed the property solely for ownership interests, which did not put it into tax-paid status.

Was original equipment tax payment proved?

No. PDF says original partnership presumably paid tax; supporting purchase/payment records absent.

Had new partnership already leased equipment?

Source conflicts: it dates lease August 14, then says new partnership now proposes to lease. No contract/outcome appears.

What happened to tax paid on half book value?

The source said it was incorrect and should be refunded or credited against tax due on rental receipts.

Did live annotation include refund or credit?

No. It publishes dissolution/contribution/rent result only.

May another partnership rely on this result?

No. It applies uncited historical partnership treatment to missing records; entity continuity, transfer steps and current law must be checked.

Citations and references

• No statute, regulation, ruling or case — cited
• December 2 request and entity/transfer/corporation/lease/tax/refund records — absent
• PDF's no-indication/presumed/timing qualifications — material source limits
• Official Annotation 330.2573 — definite abbreviated version without remedy

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2573
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2573.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Santa Rosa – District Administrator (AHT)

From:

Tax Counsel (GJJ) – Headquarters

330.2573

Date:

March 11, 1975

Subject:

This is in response to your memorandum dated December 2, 1974. We understand that --- and --- were partners in the business known as ---. Each held a 50 percent interest in the partnership. As of July 1, 1974, --- withdrew from the partnership and --are admitted to the partnership in place of ---. There is no indication that --- and the four new members of the partnership had entered into an agreement in writing providing that the withdrawal and admission would not cause the dissolution of the original partnership. Thus, it is clear that as of July 1, 1974, one partnership ended and a new partnership commenced. Also on July 1, 1974, the partners in the new partnership agreed to form a corporation and to transfer all assets of the new partnership, other that equipment, to the new corporation solely in exchange for first issue stock. On August 14, 1974, the new partnership leased to the corporation the equipment which the new partnership had retained. The original partnership had presumably paid tax on the equipment when it was originally acquired. The new partnership now proposes to lease the equipment to the corporation. We are of the opinion that tax applies to the rental receipts. The equipment does not maintain its taxpaid status in the hands of the new partnership. In fact there is no way in which the equipment could be put into a taxpaid status since all of the equipment apparently was transferred to the new partnership solely in exchange for ownership interests in the new partnership. We agree with your analysis that the outgoing partner --- sold an interest in tangible personal property to the four persons who were to become partners in the now partnership and

that this was an occasional sale. These four individuals in turn contributed what they acquired to the new partnership in exchange for interests in the new partnership. We understand that the new partnership paid tax with respect to 50 percent of the book value of the assets held by the original partnership. This was incorrect. This amount should be refunded to the new partnership or credit should be given against rental receipts due for rental of the equipment in question.

bc:

Mr. T. P. Putnam
Mr. Glenn L. Rigby
Mr. H. L. Cohen