Was a parents' gift of family-business partnership interests to their children a sale because the new partners were connected to existing business debts?

Plain-English summary

Parents operated a business as a partnership and filed gift-tax returns giving portions of their interests to two children. A new partnership of the parents and children then continued the business. The children had worked in the business and cosigned some notes, but those notes were not included as consideration for the transfer.

The hearing officer found no sale. The parents received no benefit in exchange for the gifts, and the children did not independently promise to pay old liabilities from personal resources. Their historical statutory liability as incoming partners was limited to partnership property, which had already been available for the debts before the gifts.

The transaction was therefore a gift of net capital interests without consideration. The recommendation deleted the protested asset-sale measure.

Hearing record, historical analysis, and source limits

The preliminary report covers a July 13, 1967 hearing at 11:00 a.m. in San Francisco on Form 432. It lists a January 25, 1967 billing and a July 1, 1963 through December 31, 1964 period. The petitioner's two stated contentions were that no consideration supported a sale and that the new partners did not assume the liabilities. The published source redacts the taxpayer, account number, appearances, amounts, and most individual names.

The record taxpayer was registered with the Board as an individual, but the report found from books and a partnership income-tax return that the taxpayer and spouse had operated the business as a partnership since at least 1964. Their children worked as salaried employees and had cosigned notes securing some business obligations, but before 1965 they did not share partnership profits and losses. In March 1965, each parent filed gift-tax returns making separate gifts of part of a business interest to the two children, and all four then formed a new partnership. The notes were not included as consideration for the transfers.

The report applied Revenue and Taxation Code section 6006, former Civil Code section 1605, and a contracts section of Witkin's Summary of California Law. It found no bargained-for benefit to the parents or detriment to the children and said the parents' position regarding payment of the liabilities had not changed.

Former Corporations Code section 15017 made an incoming partner liable for pre-admission partnership obligations but limited satisfaction to partnership property. Because those assets had already been available for the debt, receiving a gifted ownership interest without an independent promise to pay liabilities from other resources was only a gift of a net capital interest. The report found neither an express personal-liability agreement by the children nor one fairly implied from accepting the gifts.

The hearing officer also said individual parental gifts might independently justify treating the arrangement as two steps rather than as a partnership transfer, but expressly left that issue undecided. The recommendation was to delete the protested item from the proposed redetermination measure and have the Headquarters Petition Unit make the adjustment. A Principal Tax Auditor approved the report on September 1, 1967; the source supplies no later adjustment or final Board disposition.

The PDF does not include the Form 432, billing, books of account, partnership return, gift-tax returns, notes, debt instruments, asset or capital accounts, liability schedules, partnership agreements, employee or ownership records, transfer instruments, values, proposed measure, tax computation, petition, appearances, hearing exhibits or transcript, adjustment, final decision, payment, refund claim, appeal, or later outcome. It also gives no amount for the protested item. The displayed 7/13/1967 date is the hearing date; the formal hearing-officer report is dated August 30 and approved September 1.

The live annotation preserves the parent partnership, individual gift-tax returns, gifts to two children, new four-person partnership, consideration test, unchanged liability position, former Corporations Code section 15017 rule, partnership-property limit, no independent promise, net-capital-interest gift, no personal-liability agreement, and August 30, 1967 date. It omits the registration mismatch, underlying books and partnership return, hearing, form, billing, audit period, petitioner's contentions, salaried-employment and prior-profit facts, cosigned notes and their exclusion from consideration, Revenue and Taxation Code section 6006, Civil Code section 1605, Witkin citation, proposed two-step theory and express nondecision, recommendation-only posture, Principal Tax Auditor approval, missing records, tax amount, adjustment, final disposition, and later outcome.

What this means for you

Family-business owners

A documented gift can remain a gift when recipients do not provide money, debt relief, personal guarantees, or another bargained-for benefit in exchange.

Accountants and tax professionals

Review gift filings, partnership agreements, preexisting guarantees, liability assumptions, and whether recipients commit independent resources beyond partnership property.

Common questions

Q: Did the children's earlier note signatures count as transfer consideration?
A: No. The report says those notes were not included as consideration for the gifts.

Q: Did becoming partners make the children personally liable for all old debts?
A: Not under the historical statute applied; liability for pre-admission obligations was satisfied only from partnership property.

Q: Did the children independently promise to pay the old liabilities?
A: No. No express promise existed and one was not fairly implied from receiving the gifts.

Q: What adjustment was recommended?
A: Delete the protested item from the proposed tax measure.

Q: Did the report decide the possible two-step gift theory?

A: No. It said individual gifts by the parents might support that characterization but found it unnecessary to express an opinion.

Q: Was this a final Board decision?

A: The source is a preliminary hearing report and recommendation approved by a Principal Tax Auditor. It supplies no final Board disposition or later outcome.

Citations and references

• California Revenue and Taxation Code section 6006
• Former California Civil Code section 1605
• Former California Corporations Code section 15017
• 1 Witkin, Summary of California Law (7th ed. 1960), Contracts section 67, page 71
• Books of account, partnership income-tax return, March 1965 gift-tax returns, and cosigned business notes — described but not included
• Form 432, billing, asset, liability, partnership, transfer, tax, petition, hearing, adjustment, disposition, and outcome records — implicated but not included

Verbatim support

From the official August 30, 1967 preliminary hearing report:

The notes executed by --were not included as consideration for the transfer.

Here there was no benefit conferred or agreed to be conferred upon the transferors in exchange for the transfer. After the transfer, the transferors stood in precisely the same position with respect to payment of the liabilities as they did prior to the transfer.

Thus, where an incoming partner receives an ownership interest by way of gift and does not make an independent promise to pay the partnership liabilities from his other resources, there is no transfer for a consideration. There is merely a gift to a net capital interest.

In view of the conclusion reached above, it is deemed unnecessary to express an opinion on this point.

The protested item should be deleted from the measure of tax proposed for redetermination.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0090
• Original supporting opinion: 395.0090 PDF

Original ruling text

STATE OF CALIFORNIA
BOARD OF EQUALIZATION
DEPARTMENT OF BUSINESS TAXES

395.0090
7/13/1967

BT-169 REV. 2 (4-63)
PRELIMINARY HEARING REPORT

Report of Hearing Officer W. W. Burkettlsmk 8-30-67
Taxpayer
Account Number
Form Number:
Date of Billing:
(From:
Period
(To:
Date of Hearing July 13, 1967

Time 11 :00 a.m.

432
1-25-67
7-1-63
12-31-64

Place San Francisco

Appeared on behalf of Petitioner
Board of Equalization Representatives
Comments and Recommendations
PROCESSED ITEMS:
Sale of business assets not reported.
CONTENTIONS OF PETITIONER:
1.

There was no consideration for sale.

2.

The liabilities were not assumed by the new partners.

REPORT OF FACTS: The protested amount consists of other consideration deemed to have been received by the petitioner as the result of the transfer of the taxpayer's assets to a new commencing partner consisting of the record taxpayer ---, his wife, ---, and their two children, The pertinent facts surrounding the transfer are found to be as follows: The taxpayer was registered with the board as an individual. However, since the year 1964 and before, the business was in fact operated by --- as a partnership. This is evidenced by the books of account and a partnership income tax return filed by--- and ---. The children, --- worked in the business and had cosigned notes securing certain obligations incurred by the business. However, prior to the year 1965, they were merely salaried employees

and did not have the right to share in the partnership profits and losses. The notes executed by --were not included as consideration for the transfer. In March 1965, --- individually executed gift tax returns by which each made separate gifts of a portion of their business interest to the two children. A new partnership consisting of was then formed to conduct the business. CONCLUSIONS: It was concluded that the transfer did not constitute a "sale." In order for a sale to have occurred, the transfer of title must have been made for a legal consideration (Revenue and Taxation Code § 6006). To constitute good consideration in this instance, there must have been a benefit conferred or agreed to be conferred upon the transferors or a detriment suffered or agreed to be suffered by the transferees and the act promise or forbearance constituting that consideration must have been given in exchange for the offeror's act or promise. (See Civil Code
§ 1605; 1 Witkin Summary Cal. Law (7th ed. 1960) Contracts, § 67, p. 71.) Here there was no benefit conferred or agreed to be conferred upon the transferors in exchange for the transfer. After the transfer, the transferors stood in precisely the same position with respect to payment of the liabilities as they did prior to the transfer. While Corporations Code § 15017 provides that a partner admitted into an existing partnership is liable for all the obligations of the partnership arising before his admission as though he had been a partner when such obligations were incurred, the statute expressly provides: "... that this liability shall be satisfied only out of partnership property." (Emphasis added.) These assets were previously available for payment of the debt. Thus, where an incoming partner receives an ownership interest by way of gift and does not make an independent promise to pay the partnership liabilities from his other resources, there is no transfer for a consideration. There is merely a gift to a net capital interest. The transferee - donees - did not expressly agree to become personally liable for the pre-existing obligations and such cannot be fairly implied from the receipt of the gift. It is also entirely possible that the making of a gift by the individual parents would constitute a valid reason for recognizing the transfer as a two-step transaction rather than a transfer by the partnership. In view of the conclusion reached above, it is deemed unnecessary to express an opinion on this point. RECOMMENDATION: The protested item should be deleted from the measure of tax proposed for redetermination. Adjustment to be made by Headquarters, Petition Unit. W. E. Burkett, Hearing Officer WEB:kc APPROVED: 9-1-67 Principal Tax Auditor

Date