Were three construction joint ventures separate taxable entities, and were equipment transfers among them or back to venturers taxable?

Plain-English summary

Three firms formed three separate joint ventures for large construction projects. Each project had its own written agreement and income-tax return, and ownership percentages differed in the third venture. Before 80% project completion, equipment moved among ventures or back to individual venturers; one firm later withdrew from all three.

Counsel treated each joint venture as a separate person under section 6005. Transfers between the ventures were therefore sales subject to tax unless a Regulation 1595(b) reorganization transferred at least 80% of the tangible personal property while ultimate ownership remained substantially similar.

Equipment returned to an individual venturer before project completion was also a taxable sale when the venture debited the venturer's advance account, because that debit was consideration. Each project had to be analyzed separately.

When one retailer-venturer sold all its interests to the other two, counsel treated the tangible-property transfer for consideration as a taxable retail sale.

Three ventures, five questions, and source limits

Headquarters Tax Counsel, identified by the initials LS, answered September 15 and October 13, 1982 memoranda from Oakland Auditing (LFF). Three redacted firms had entered three separate joint ventures for three large construction projects under agreements dated March 5, 1978, November 17, 1978, and March 18, 1980. Each venture filed a separate income-tax return.

The live annotation labels the venturers A, B, and C. Ventures 1 and 2 were owned 40%, 35%, and 25%; Venture 3 was owned 59%, 39.5%, and 1.5%. Before each project reached 80% completion, equipment moved to another venture or back to an individual venturer. Some equipment returned to a venturer was then contributed to another venture in ratios matching the owners' interests in the source venture. One unidentified venturer withdrew entirely from all three in August 1981.

Counsel gave five answers. First, Revenue and Taxation Code section 6005 includes a joint venture within person; Nelson v. Abraham, 29 Cal.2d 745, and Holtz v. United Plumbing & Heating Co., 49 Cal.2d 501, supplied the single-profit-enterprise definition. After reviewing the absent agreements, counsel found three separate joint ventures and persons.

Second, venture-to-venture sales were taxable unless Regulation 1595(b) applied to a sale or reorganization transferring at least 80% of all tangible personal property while real or ultimate ownership remained substantially similar. Third, property withdrawn by a venturer with a debit to its advance account was a consideration-bearing sale rather than a liquidating dividend, under historical BTLG Annotation 495.0780. Fourth, each project had to be considered separately because a different venture performed it.

Fifth, when one venturer sold all its interests to the other two, counsel understood every venturer to be a retailer in its own right holding a California seller's permit. On those circumstances, transferring tangible personal property to the remaining venturers for consideration was a taxable retail sale. The source does not quantify or identify the transferred property or tax.

The PDF does not include either request memorandum, the three joint-venture agreements, income-tax returns, firm or project identities, project plans or completion records, equipment inventories, titles, values, transfer and contribution records, ownership schedules, advance-account ledgers, consideration, Regulation 1595 calculations, withdrawal and interest-sale agreements, retailer records, seller's permits, invoices, returns, audit workpapers, tax measure or amount, assessment, protest, payment, appeal, or later outcome. It gives staff answers to described facts but does not show the transfers' actual tax treatment or an administrative disposition. The opening line prints September 15 October 13 without a conjunction, and the final answer prints Our 'understanding and co- venturers; the original tail preserves those forms.

The live annotation preserves the three-firm ownership table, separate-entity result, taxable venture-to-venture and pre-80%-completion transfers, and conditional retailer-venturer interest-sale result and October 27, 1982 date. It omits the two request memoranda, agreement dates and counsel's review, separate returns, inter-venture contribution ratios, August 1981 withdrawal, section 6005, both cases and the joint-venture definition, Regulation 1595(b)'s 80%-of-all-property and substantially-similar-ownership exception, advance-account consideration, liquidating-dividend issue, BTLG Annotation 495.0780, separate-project answer, seller-permit premise, missing records, tax amount, administrative posture, wording defects, and later outcome.

What this means for you

Businesses using several joint ventures

Similar owners did not merge separately documented ventures. Property moving between them could be taxable just like a transfer between unrelated entities.

Accountants and tax professionals

Maintain project-specific agreements, returns, ownership schedules, equipment ledgers, advance accounts, and withdrawal documents. A debit or inter-venture account entry can be consideration.

Common questions

Q: Was each construction venture a separate entity?

A: Yes, for California sales and use tax.

Q: Were inter-venture equipment transfers taxable?

A: Yes, unless the 80% property and ownership-continuity requirements were met.

Q: Were equipment withdrawals liquidating dividends?

A: No. Debiting the venturer's advance account made them sales for consideration.

Q: Were all three projects combined for analysis?

A: No. Each separate joint venture was considered independently.

Q: What made an equipment withdrawal a sale?

A: The venture transferred tangible personal property and debited the receiving venturer's advance account, which counsel treated as consideration.

Q: Did the source establish the ventures' actual tax liabilities?

A: No. It gives conditional internal answers but supplies no transfer documents, tax measure, assessment, payment, appeal, or later outcome.

Citations and references

• California Revenue and Taxation Code § 6005
• California Sales and Use Tax Regulation 1595(b)
• Nelson v. Abraham (1947) 29 Cal.2d 745
• Holtz v. United Plumbing & Heating Co. (1957) 49 Cal.2d 501
• Historical Business Taxes Law Guide Annotation 495.0780
• September 15 and October 13, 1982 Oakland Auditing memoranda, three venture agreements, and separate income-tax returns — described but not included
• Project, completion, equipment, title, transfer, ownership, account, withdrawal, permit, sale, return, audit, tax, administrative, and outcome records — implicated but not included

Verbatim support

From the official October 27, 1982 Tax Counsel memorandum:

Revenue and Taxation Code section 6005 defines "person" to include joint ventures.

Your description of the arrangements herein coupled with our review of the agreements which you provided clearly indicate that each of the three arrangements was a joint venture and, accordingly, a "person" to be treated as a separate entity.

The only qualification to our response would arise if there was a sale or reorganization pursuant to Regulation 1595, subdivision (b), i.e., where the transfer was of 80% or more of all tangible personal property and real or ultimate ownership was "substantially similar" after the transfer.

Joint ventures are similar to partnerships and withdrawals of property by a joint venturer and the debiting of its advance accounts are transfers of tangible personal property for a consideration and, therefore, sales of the property transferred (See BTLG anno. 495.0780).

Under such circumstances, we would view the transfer of tangible personal property from the withdrawing co-venturer to the remaining co-venturers for a consideration as a taxable retail sale (See BTLG anno. 495.0780).

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0093
• Original supporting opinion: 395.0093 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Oakland - Auditing (LFF)

From:

Tax Counsel (LS) - Headquarters

395.0093

Date:

October 27, 1982

Subject:

This is in response to your memoranda of September 15 October 13, 1982. You indicated that ---entered into three separate joint ventures for purposes of accomplishing three large construction projects. Separate written agreements were executed for each project and were dated, respectively, March 5, 1978, November 17, 1978, and March 18, 1980. Prior to 80% completion of the projects, equipment was transferred either to one of the other joint ventures or back to the individual joint venturers. In some cases, equipment transferred back to a joint venturer was subsequently transferred into one of the other joint ventures. Where this was done, the contributions were in ratios equal to the joint venturers' interests in the joint venture from which the equipment was derived. Each of the joint ventures filed separate income tax returns. Ownership interests in the three joint ventures were as follows:

1. March 5, 1978 joint venture
2. November 17, 1978 joint venture
3. March 18, 1980 joint venture

40%
40%
59%

35%
35%
39.5%

25%
25%
1.5%

--- we understand, withdrew totally from all three joint ventures in August 1981. Based on the foregoing, you asked the following questions. Our responses will follow each question. A. Is each joint venture a separate entity?

Yes. Revenue and Taxation Code section 6005 defines "person" to include joint ventures. "Joint venture" has been defined by the California courts as an undertaking by two or more persons, without a corporate or partnership designation, formed for the purpose of carrying out a single business enterprise for profit (See Nelson v. Abraham, 29 Cal.2d 745; Holtz v. United Plumbing & Heating Co., 49 Cal.2d 501). Your description of the arrangements herein coupled with our review of the agreements which you provided clearly indicate that each of the three arrangements was a joint venture and, accordingly, a "person" to be treated as a separate entity. B. If question (A) is affirmative, would sales between the joint ventures be subject to tax? Yes. The only qualification to our response would arise if there was a sale or reorganization pursuant to Regulation 1595, subdivision (b), i.e., where the transfer was of 80% or more of all tangible personal property and real or ultimate ownership was "substantially similar" after the transfer. Under such circumstances, no tax would be due. C. Is it proper to consider transfers back to the individual partners, prior to 80% completion of each project, not as liquidating dividends but as sales subject to tax. Yes. Joint ventures are similar to partnerships and withdrawals of property by a joint venturer and the debiting of its advance accounts are transfers of tangible personal property for a consideration and, therefore, sales of the property transferred (See BTLG anno. 495.0780). D. In regard to transfers back as described in (C), would each project be considered separately or would all three projects have to be considered as a whole? Since each project was performed by a different joint venture, each project should be considered separately. E. Where one of the joint venturers sold all of its interest in each joint venture to the other two co-venturers, would the seller-venturer have made a taxable retail sale? Our 'understanding is that each of the co- venturers is a retailer in its own right and each holds a California seller's permit. Under such circumstances, we would view the transfer of tangible personal property from the withdrawing co-venturer to the remaining co-venturers for a consideration as a taxable retail sale (See BTLG anno. 495.0780). LS:at