Was every partner's simultaneous interest transfer to a corporation treated as a sale of the restaurant's tangible property?

Plain-English summary

All partners simultaneously transferred their partnership interests for consideration. Although the letter initially calls the recipient a third person, it later identifies the recipient as a corporation. The Board viewed the substance as a transfer of title and possession of the partnership's specific tangible property, not merely abstract partner interests.

The partnership operated a restaurant, so its property was held or used in an activity requiring a seller's permit. Counsel therefore concluded that the transfer was a sale under section 6006(a) and that the property could not receive occasional-sale treatment under section 6006.5(a). No adjustment to the tax measure was recommended, but an oral Board hearing remained available.

The letter also explained that two Northrup actions had settled through stipulated judgments, one for the Board and one for the plaintiffs. Because neither produced a decision on the merits, those cases did not resolve the legal question.

Petitions, transaction substance, unresolved litigation, and source limits

The unsigned November 16, 1959 letter follows an October 27 preliminary hearing on petitions for redetermination filed for redacted taxpayers. It says Board staff told the taxpayers at the hearing that litigation was then addressing whether every partner's simultaneous transfer of partnership interests to a third person could be a sale under section 6006(a). The source supplies no heading identifying the taxpayers, author, addressee, audit period, transaction date, tax measure, or hearing participants.

After returning from the hearing, counsel learned that Northrup, et al. v. State Board of Equalization, Los Angeles Superior Court Nos. 705955 and 705956, had been resolved by stipulated judgments: one for the Board and one for the plaintiffs. The plaintiffs' attorneys are redacted. Counsel expressly said the opposing settlements meant the question would not be resolved on its merits in those actions. The complaints, transaction facts, judgments, stipulations, docket history, and settlement terms are not included.

Staff nevertheless stated its own position. Section 6006(a) defined a sale to include any conditional or unconditional transfer of title or possession of tangible personal property for consideration, regardless of manner or means. Although the transaction took the form of partners transferring their respective interests, the parties considered it a transfer to a corporation of the specific partnership property used and owned in the business. Counsel therefore treated the simultaneous transfers as conveying title and possession of tangible property for consideration.

The partnership operated a restaurant, and its property was held or used in an activity requiring a seller's permit. Section 6006.5(a) therefore did not make the property the subject of an occasional sale under counsel's analysis. The source does not identify the tangible assets, state whether every partnership asset transferred, allocate consideration between tangible property and other interests, or reproduce the agreement showing what the parties intended and accomplished.

Counsel could not recommend any adjustment to the tax measure. Because Northrup had ended without a merits decision, the petitioners were invited to request an oral hearing before the Board. The PDF includes no response, hearing request, further briefing, Board order, adjusted or sustained amount, payment, refund, appeal, or later outcome. It also omits the petitions, preliminary-hearing record, partnership and purchaser identities, partnership agreement and ownership percentages, transfer contract, asset schedule and valuation, consideration and liabilities, possession and title records, restaurant permit and operations, tax returns, audit report and schedules, and notices of determination.

The live annotation preserves the simultaneous transfers by all partners, consideration, section 6006(a), substance-over-form treatment, third-person recipient, and specific partnership-property conclusion. It uses the phrase “partnerships property,” while the supporting letter refers to “partnership property.” The live text omits the purchasing corporation; restaurant and permit-requiring use; section 6006.5(a); preliminary hearing and petitions; Northrup actions, opposing stipulated judgments, and no-merits limitation; no-adjustment recommendation; oral-hearing invitation; missing transaction, litigation, and audit records; and final-outcome gap.

What this means for you

Partners selling an entire business

Under this historical staff position, selling every partnership interest at once could be analyzed as a transfer of the underlying tangible assets when that is what the parties intended and accomplished. The missing agreements make that factual premise especially important.

Restaurant owners and tax professionals

Review the transaction's substance, agreement, asset schedule, title and possession, consideration allocation, liabilities, and seller-permit use rather than relying only on an interest-sale label.

Common questions

Q: What made the interest transfers a sale?
A: They transferred title and possession of tangible partnership property for consideration.

Q: Why did occasional-sale treatment fail?
A: The restaurant property was held or used in a permit-requiring activity.

Q: Did the Northrup litigation establish a rule?
A: No. The cases ended in opposing stipulated judgments without a merits decision.

Q: What did counsel recommend?
A: No adjustment, while offering the petitioners a Board hearing.

Q: Who acquired the partnership interests?

A: The opening describes a third person, and the substantive analysis later identifies the recipient as a corporation. The recipient's name is not provided.

Q: Did the source show the agreement or asset schedule?

A: No. It states how the parties considered the transfers but supplies no contract, property list, valuation, or consideration allocation.

Q: Did the recommendation end the petition?

A: The source does not say. It invited an oral Board hearing and provides no response, final order, or later outcome.

Citations and references

• California Revenue and Taxation Code §§ 6006(a) and 6006.5(a)
• Northrup, et al. v. State Board of Equalization, Los Angeles Superior Court Nos. 705955 and 705956
• October 27, 1959 preliminary hearing and petitions for redetermination — identified; petitions and hearing record not included
• Opposing Northrup stipulated judgments — described; complaints, stipulations, judgments, and settlement records not included
• Partnership, purchaser, transfer, asset, consideration, restaurant, permit, audit, oral-hearing, and final-outcome records — described or implicated but not included

Verbatim support

From the official November 16, 1959 Board letter:

Although in form there is a transfer of the partners respective “interests” in the partnership, they are in fact transfers of the partnership property and were considered by the parties as transferring to the corporation the specific partnership property owned and used in the partnership business.

The partnership business here consisted of operating a restaurant and thus, the property was held or used in an activity requiring a seller’s permit and cannot be considered as the subject of an occasional sale within the meaning of §6006.5(a) of the Sales and Use Tax Law.

For the reasons expressed above, we cannot recommend any adjustment in the measure of tax. In view of the fact that the pending litigation has been settled without a decision on the merits, you may desire an oral hearing before the board on your petitions for redetermination.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.0820
• Original supporting opinion: 395.0820 PDF

Original ruling text

395.0820

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

11-16-59

At the preliminary hearing held on 10-27-59, on the petitions for redetermination filed on behalf of the above taxpayers, we advised you that we are currently litigating the question of whether simultaneous transfers of all partnership interests in a partnership to a third person could constitute a sale within the meaning of §6006(a) of the Sales and Use Tax Law. The cases to which I referred are Northrup, et al. v. SBE, LASC # 705955 and 705956. Upon returning to our office, I found that these actions were settled by stipulated judgments under which judgment was entered for the board in one action and for the plaintiffs in the other action. The attorneys for the plaintiffs were L--- and W--- of L--- A---. The effect of the stipulated judgments is that the question presented will not be resolved on its merits in those actions. We think that a simultaneous transfer by all of the partners of their respective partnership interests constitutes a sale within the meaning of §6006(a) of the Sales and Use Tax Law, which defines a sale as including any transfer of title or possession, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration. Such transfers are sales in that they contemplate and involve the transfer of title and possession of tangible personal property for a consideration. Although in form there is a transfer of the partners respective “interests” in the partnership, they are in fact transfers of the partnership property and were considered by the parties as transferring to the corporation the specific partnership property owned and used in the partnership business. The partnership business here consisted of operating a restaurant and thus, the property was held or used in an activity requiring a seller’s permit and cannot be considered as the subject of an occasional sale within the meaning of §6006.5(a) of the Sales and Use Tax Law. For the reasons expressed above, we cannot recommend any adjustment in the measure of tax. In view of the fact that the pending litigation has been settled without a decision on the merits, you may desire an oral hearing before the board on your petitions for redetermination. If such a hearing is desired, will you please advise us at your early convenience.