Did three partnership-interest sales become one partnership asset sale merely because a litigation settlement put the closings on the same day?

Plain-English summary

Three partners in a California limited partnership had granted a former corporate shareholder options to buy their partnership interests at fair market value. One partner agreed in August 1983 to sell its 26-percent interest for $150,000, but the other partners objected and sued. A June 1984 settlement ended the litigation and set $2.24 million and $1.26 million prices for the remaining 48-percent and 26-percent interests. All purchases ultimately closed on November 15, 1984.

The audit treated the closings as one transfer of partnership assets. The Appeals recommendation instead treated them as three individual interest sales. The partners did not act in concert: they had negotiated at different times and prices, resisted one another, and closed together only because of the litigation settlement.

Staff therefore treated each partner as making a separate occasional sale and said the petitioners in their individual capacities were not required to hold seller's permits. The recommendation says to grant the petition and redetermine without further adjustment. It identifies a $2,914,930 audit-item measure and a $2,641,131 protested portion but supplies no final computation or Board action.

Ownership history, litigation, distinct terms, and source limits

Hearing Officer John B. Adamo issued the Decision and Recommendation on July 5, 1988 after a February 10 preliminary hearing in Culver City. Two redacted company representatives—a general counsel and controller—appeared for the petitioners, and Tax Auditor Larry Nakano appeared for the Board. The redacted petition covered January 1, 1983 through November 30, 1984 and protested audit item D, a sale of fixtures and equipment.

On December 30, 1982, two sole shareholders sold all stock of a redacted corporation to a California limited partnership formed by the three petitioners: one corporation and two individuals. Each partner granted one former shareholder an option to buy that partner's individual partnership interest at fair market value. The source does not include the stock-sale agreement, partnership agreement, option documents, valuations, asset records, or the reason the audit characterized the later transactions as fixtures-and-equipment sales.

Around August 1983, the option holder offered $150,000 for one individual's 26-percent partnership interest, and that partner agreed. In October, the 48-percent corporate partner and other 26-percent individual partner learned of the agreement, claimed rights of first refusal, and resisted exercise of the options on their own interests. On or about January 9, 1984, they filed Los Angeles Superior Court complaints against the option holder and selling partner, alleging breaches and seeking an injunction, damages, and declaratory relief. The source gives no case numbers and includes no pleadings, orders, or docket.

In June 1984, the buyer and two opposing partners settled. The settlement terminated the litigation and allowed purchase of the corporate partner's 48-percent interest for $2.24 million and the other individual's 26-percent interest for $1.26 million, with closings on or before November 15, 1984. The buyer also closed the earlier $150,000 transaction that day on its previously agreed basis.

One sentence says the 48-percent and 26-percent purchases concluded on November 15, 1982. That cannot be reconciled with the same source's June 1984 settlement, November 15, 1984 deadline, later references to “the November 15, 1984 transactions,” January 1983–November 1984 audit period, or the live annotation's 1984 date. This page therefore uses November 15, 1984 for the closings and preserves the printed 1982 conflict rather than silently reproducing it.

Audit staff treated the events as one transfer from the limited partnership to the buyer. Petitioners characterized them as multiple transfers by the individual partners. The recommendation quoted BTLG Annotations 395.0800 and 395.0820. It read 395.0820's simultaneous-transfer rule as requiring concerted partner action that, in substance, transferred partnership property. Here, the first agreement arose months earlier, the terms differed dramatically, two partners had tried to block the first sale, and open litigation replaced common action. The same-day settlement closings therefore did not turn the three transfers into one partnership sale.

The recommendation says gross receipts from occasional sales were exempt under Revenue and Taxation Code section 6387, exactly as printed, then quotes section 6006.5(a) and Regulation 1595(a)(1). The source does not explain the section 6387 citation. It concludes that the partners' separate interest transfers were occasional because the petitioners in their individual capacities were not required to hold seller's permits.

The document first lists $2,641,131 beside the protested sale-of-fixtures-and-equipment item. Its final page distinguishes a $2,914,930 measure for audit item D from a $2,641,131 protested portion. Adamo recommends: “Grant the petition. Redetermine without further adjustment.” The record does not supply the initial or revised audit schedule, explain the $273,799 difference, quantify the recommended redetermination, or show final Board adoption.

The PDF also omits the petition; stock, partnership, option, and right-of-first-refusal agreements; ownership and fair-market-value support; complaints and litigation record; settlement and closing documents; payment and title evidence; fixture and equipment schedule; tax returns and permits; audit report and schedules; hearing transcript and exhibits; post-hearing submissions; final Board decision; refund or payment; and later outcome.

The live annotation retains the corporate-stock acquisition, three partners and options, percentages, 1983 proposed sale, objections, litigation, June 1984 settlement, November 15, 1984 closings, audit-versus-petitioner characterization, separate terms, open conflict, lack of common action, and occasional-sale result. It substitutes letters A through F for the source's redacted parties and omits the transaction prices; December 30, 1982 stock-sale date; January 9 complaint date and remedies; California limited-partnership form; fair-market-value evidence; preliminary hearing, participants, audit period, and both audit amounts; statutes, regulation, and quoted annotations; printed section 6387 citation; printed 1982 closing conflict; grant recommendation; missing records; and final-outcome gap.

What this means for you

Partners resolving ownership disputes

Same-day closings do not automatically become one partnership-level asset sale when the partners' transactions remain genuinely separate and adversarial.

Accountants and tax professionals

Preserve evidence of separate offers, pricing, options, first-refusal claims, litigation, and settlement mechanics. Calendar simultaneity is only one fact in determining concerted action.

Common questions

Q: Why were the sales not treated as simultaneous partnership action?
A: The partners negotiated separately, sold on different terms, and had been in open conflict.

Q: Why did all closings occur on one day?
A: The litigation settlement coordinated closing timing, not a joint plan to sell partnership assets.

Q: Were the individual sellers required to hold permits?
A: No, under the facts accepted by the recommendation.

Q: What was recommended?
A: Grant the petition and redetermine without further adjustment.

Q: What prices did the three partners receive?

A: The first 26-percent interest was priced at $150,000; the settlement priced the 48-percent interest at $2.24 million and the other 26-percent interest at $1.26 million.

Q: Why does this page use November 15, 1984?

A: The settlement chronology, required closing deadline, repeated operative references, audit period, and live annotation all say 1984. One source sentence prints 1982, and that conflict remains disclosed.

Q: Were the audit measure and protested portion the same?

A: No. The final page gives a $2,914,930 audit-item measure and a $2,641,131 protested portion; the supporting schedules and final computation are absent.

Q: Does the recommendation show final Board adoption?

A: No. It recommends granting the petition but provides no final order, tax computation, payment, or refund outcome.

Citations and references

• California Revenue and Taxation Code § 6006(a)
• California Revenue and Taxation Code § 6387 — cited exactly as printed for the occasional-sale exemption; the source does not explain the citation
• California Revenue and Taxation Code § 6006.5(a)
• California Sales and Use Tax Regulation 1595(a)(1)
• BTLG Annotation 395.0800 (December 16, 1952) — quoted and applied
• BTLG Annotation 395.0820 (November 16, 1959) — quoted and distinguished
• January 9, 1984 Los Angeles Superior Court complaints — described; case numbers, pleadings, and docket not included
• June 1984 settlement agreement — described but not included
• Ownership, option, transaction, litigation, closing, asset, audit, hearing, final-decision, payment, and refund records — described or implicated but not included

Verbatim support

From the official July 5, 1988 Decision and Recommendation:

Where, as here, there is not only a lack of concerted effort by the partners, but actually open conflict between them, the annotation has no application.

The sales were not simultaneous and they were on different terms. The same-day closings were a response to the litigation, not evidence of commonality of action by the partners.

The measure of tax of audit item D is $2,914,930. The protested portion is $2, 641,131.

Grant the petition. Redetermine without further adjustment.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.0821
• Original supporting opinion: 395.0821 PDF

Original ruling text

STATE OF CALIFORNIA

395.0821

BOARD OF EQUALIZATION

In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of:
W---, INC., ET AL.
dba U--- P--- COMPANY
Petitioner

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DECISION AND RECOMMENDATION

No.

SR -- XX XXXXXX-010

The preliminary hearing on the above taxpayers’ petition for redetermination was held on February 10, 1988, in Culver City, California. Hearing Officer:

John B. Adamo

Appearing for Petitioner:

L--- J. S--General Counsel, U--- P--T--- C--Controller, U--- P---

Appearing for the Board:

Larry Nakano
Tax Auditor
Protested Item

The protested tax liability for the period January 1, 1983 through November 30, 1984 is measured by: State, Local and County

Item
D.

Sale of fixtures and equipment

$2,641,131
Summary

On December 30, 1982, J--- and P--- M---, the sole shareholders of U--- P--- Corporation (“U--- Corp.”), sold all of their stock to U--- P--- Company (“U--- Co.”), a California limited partnership comprised of petitioners, i.e., W---, Inc., M--- C---, and E--- T. S---. Each of the three partners granted to J--- M--- an option to purchase their individual partnership interest for a price equal to fair market value.

W---, INC., ET AL.
dba U--- P--- COMPANY

-2-

July 5, 1988
395.0821

In or about August 1983, J--- M--- approached M--- C--- and offered to purchase the latter’s 26 percent partnership interest for $150,000; Mr. C--- agreed. In October 1983, W---, Inc. and Mr. S--- learned of M---’s agreement to purchase C---’s share. These two objected to that agreement, contending that they had a right of first refusal to purchase C---’s partnership interest. They further resisted M---’s attempt to exercise his option to purchase their interests. On or about January 9, 1984, W---, Inc. and S--- filed complaints in Los Angeles Superior Court against M--- and C---, alleging various breaches and praying for injunction, damages, and declaratory relief. In June 1984, M---, W---, Inc., and S--- entered into a settlement agreement. Among other things, this settlement agreement provided for terminating the litigation and allowed for M---’s purchase of W---, Inc.’s 48 percent partnership interest for $2,240,000 and S---’s 26% partnership interest for $1,260,000. The agreement provided that these transactions were to close on or before November 15, 1984. Mr. M--- concluded his purchases of W---, Inc.’s and S---’s partnership interests on November 15, 1982. He also concluded his purchase of C---’s interest on the same day on the previously agree-upon basis. As further explained below, the issue presented by this case involves the interpretation and application of two annotations and, specifically, whether there was one transfer by U--- Co. to M--- or whether there were multiple transfers from the individual partners of their respective partnership interests to M---. The audit staff concluded that the former was the case; petitioners contend that the latter characterizes the substance of the November 15, 1984 transactions, which therefore constitute exempt occasional sales. Analysis and Conclusions Gross receipts derived from the “occasional sale” of tangible personal property are exempt from the sales tax. (Revenue and Taxation Code Section 6387.) The term “occasional sale” is defined by Section 6006.5(a) as follows: “A sale of property not held or used by a seller in the course of activities for which he or she is required to hold a seller’s permit or permits if the activities were conducted in this state, provided the sale is not one of a series of sales sufficient in number, scope, and character to constitute an activity for which he or she is required to hold a seller’s permit or would be required to hold a seller’s permit if the activity were conducted in this state.” In relevant part, Sales and Use Tax Regulation 1595(a)(1) provides as follows: “Tax applies to all retail sales of tangible personal property including capital assets whether sold in one transaction or in a series of sales, held or used by the seller in the course of an activity or activities for which a seller’s permit is required or would be required if the activity or activities were conducted in this state….

W---, INC., ET AL.
dba U--- P--- COMPANY

-3-

July 5, 1988
395.0821

“Generally, a person who makes three or more sales for substantial amounts in a period of 12 months is required to hold a seller’s permit. A person who makes a substantial number of sales for relatively small amounts is also required to hold a seller’s permit. “Tax does not apply to a sale of property held or used in the course of an activity not requiring the holding of a seller’s permit unless the sale is one of a series of sales sufficient in number, scope and character to constitute an activity for which the seller is required to hold a seller’s permit or would be required to hold a seller’s permit if the activity were conducted in this state….” The issue presented by this petition centers upon the application of two Business Taxes Law Guide annotations, i.e., 395.0800 (Dec. 16, 1952) and 395.0820 (Nov. 16, 1959), which provide as follows: 395.0800. “Partnership, sale of one partner’s share to another person regarded as an occasional sale if made by the individual partner and not by the partnership and if the individual had not otherwise made a series of taxable sales.” 395.0820. “Partnership--Sale of Interests. A simultaneous transfer by all of the partners of their respective partnership interests for a consideration constitutes a sale within the meaning of Section 6006(a). Although in form the partners are making transfers of their respective ‘interests’ in the partnership, the transfers are in fact transfers of specific partnership property to a third person.” The evidence herein plainly supports the conclusion that the November 15, 1984 transactions constituted sales by petitioners of their respective partnership interests. Those sales accordingly qualify as exempt occasional sales since petitioners as individuals were not required to hold seller’s permits. The fact that all three partners sold their partnership interests to M--- on the same day is irrelevant under the circumstances presented and, specifically, those circumstances are easily distinguishable from annotation 395.0820. First of all, C---’s sale to M--- was not simultaneous with those of W---, Inc. and S---. In fact, M--- and C--- had attempted to consummate their transaction months earlier. That sale was thwarted by the litigation referenced above. When C--- and M--- finally did complete their transaction, it was on vastly different terms than were the sales of the W--- and S--- interests. Annotation 395.0820 addresses a situation wherein a transfer by all partners of their individual interests in reality constitutes a transfer by the partnership itself. That annotation contemplates action in concert by the partners, thereby explaining the reference to “a simultaneous transfer”. Where, as here, there is not only a lack of concerted effort by the partners, but actually open conflict between them, the annotation has no application. Finally, the fact that C---’s sale was transacted on the same day as the S--- and W--- sales does not alter our conclusion. The sales were not simultaneous and they were on different terms. The same-day closings were a response to the litigation, not evidence of commonality of action by the partners.

W---, INC., ET AL.
dba U--- P--- COMPANY

-4-

July 5, 1988
395.0821

The measure of tax of audit item D is $2,914,930. The protested portion is $2, 641,131. Recommendation Grant the petition. Redetermine without further adjustment.

________
John B. Adamo, Hearing Officer

July 5, 1988
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Date