Was selling a limited partnership interest in a racehorse venture a taxable transfer of the partnership's tangible property?

Plain-English summary

Van Nuys District asked whether selling interests in a racehorse limited partnership was subject to sales or use tax. An offering circular suggested the partnership might not yet have purchased the horse, but the memorandum also analyzed the result assuming it already owned tangible property.

The memorandum compared limited partnership interests to corporate shares. Under the cited agreement and historical statutes, a limited partner had no interest in specific partnership property and no right to receive property other than money unless the agreement provided otherwise; the memorandum says this agreement did not.

The interest was therefore intangible personal property, and its sale did not transfer the partnership's horse or other tangible assets. The conclusion depended on the seller remaining a limited partner rather than taking actions that destroyed that status and effectively made the person a general partner.

District request, two property assumptions, limited status, and source limits

Tax Counsel David H. Levine sent the internal memorandum to G. M. Swan of Van Nuys District on December 10, 1986. It answers Swan's October 24 memorandum to Tax Counsel Les Sorensen. The request and its attachments are absent. The subject identifies a redacted venture, H--- F---, and says No Permit, but the source does not explain whose permit status that denotes.

The submitted offering circular made it appear that the limited partnership had not yet purchased the racehorse. Levine first said that if this was true and the partnership owned no other tangible personal property, sales of the interests transferred no tangible property and were outside sales and use tax. The circular is not included, so the acquisition status and no-other-property condition cannot be independently checked.

For the rest of the opinion, Levine assumed the partnership did own tangible personal property when the interests transferred. He analogized corporate shares—intangible representations of corporate ownership—to limited partnership interests. Sections 6006.5(b) and 6281 were cited for treating shareholders as ultimate owners of corporate property without making a stock transfer a taxable transfer of that property.

The memorandum then relied on former Corporations Code sections 15501 and 15611 et seq. A limited partner generally was not liable for partnership obligations unless named as a general partner or participating in control, had rights to reports and information under section 15634, lacked an interest in specific partnership property under section 15636, and had no right to receive property other than money on a distribution unless the agreement said otherwise under section 15671. Levine states that this agreement contained no contrary distribution specification.

Levine also cited Van Arsdale v. Claxton, 391 F.Supp. 538 (S.D. Cal. 1975), for treating limited partnership interests as securities under federal and California securities statutes. Based on the statutory rights, agreement, and analogy, he classified the redacted venture's limited-partner interests as intangible personal property. Their sales were not subject to sales or use tax, provided each selling limited partner had taken no action destroying limited status and effectively becoming a general partner.

The PDF does not identify the partnership, promoters, general or limited partners, number or percentage of interests, proposed or completed buyers and sellers, offering terms, price, transaction date, horse, other assets, partnership purpose or activity, permit status, partner conduct or control, distributions, liabilities, sales documents, returns, audit, assessment, later response, or outcome. It also omits the October 24 request, offering circular, partnership agreement, formation records, ownership ledger, property and acquisition records, and evidence supporting the limited-status condition. Don Hennessy and Les Sorensen appear only under the memorandum's bc line.

The live annotation preserves the corporate-stock analogy, no-specific-property interest, money-only distribution rule unless the agreement differs, racehorse ownership assumption, intangible classification, and no-tax conclusion. It adds (Am. 2002–2) but does not identify the amendment or explain what changed. It omits the October 24 request and Les Sorensen referral; offering circular; apparent not-yet-purchased horse and no-other-property alternative; No Permit subject; assumption for the rest of the analysis; sections 6006.5(b), 6281, and all former partnership provisions; report and information rights; liability and control rules; Van Arsdale securities analogy; actual limited-status condition; blind-copy recipients; missing records; and outcome gap.

What this means for you

Investors selling limited partnership interests

A transfer of a genuine investment interest can be distinct from a transfer of the entity's underlying tangible assets, but the agreement and the seller's actual control conduct matter.

Accountants and tax professionals

Review the partnership agreement, specific-property and distribution rights, liability provisions, control rights, and the seller's actual conduct before classifying the transferred interest.

Common questions

Q: Did it matter whether the partnership already owned the horse?
A: No for the memorandum's ultimate analysis; it treated a true limited partnership interest as intangible even assuming tangible property was owned.

Q: Did a limited partner own specific partnership property?
A: Not under the cited statutes and agreement.

Q: Was the interest sale subject to sales or use tax?
A: No, because the transferred interest was intangible property.

Q: What could change the result?
A: Conduct that destroyed limited-partner status and effectively made the seller a general partner.

Q: What if the partnership had not yet bought the horse?

A: If it also owned no other tangible property, Levine said the interest transfers involved no tangible-property transfer and were outside sales and use tax.

Q: Did the source include the offering circular or partnership agreement?

A: No. It describes both, but the records needed to verify property ownership, distribution rights, and control terms are absent.

Q: What does “Am. 2002–2” on the live annotation establish?

A: Only that the annotation labels itself amended. The live page does not identify the amendment or explain its effect.

Q: Does the memorandum show an actual sale or tax outcome?

A: No. It identifies no buyer, seller, price, sale date, return, audit result, or later agency action.

Citations and references

• California Revenue and Taxation Code §§ 6006.5(b) and 6281
• Former California Corporations Code §§ 15501 et seq., 15611 et seq., 15632(a), 15634, 15636, and 15671
• Van Arsdale v. Claxton, 391 F.Supp. 538 (S.D. Cal. 1975)
• October 24, 1986 Van Nuys District memorandum to Les Sorensen — identified but not included
• Offering circular and partnership agreement — described but not included
• Formation, interest, property, horse, control, distribution, transfer, tax, audit, and outcome records — described or implicated but not included
• Don Hennessy and Les Sorensen — listed under the memorandum's bc line

Verbatim support

From the official December 10, 1986 David H. Levine memorandum:

If this is true and the partnership owns no other tangible personal property, then sales of limited partnership interests are not subject to sales or use tax since transfers of those interests involve no transfer of tangible personal property.

But a limited partner has not interest in specific partnership property and has not right to receive property other than money upon any distribution unless otherwise specified in the partnership agreement (here, there is no specification otherwise).

Therefore, the sale of these limited partnership interests are not subject to sales or use tax provided that the limited partner whose interest is sold has not taken any action which destroys his status as a limited partner (making him, in effect, a general partner).

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.0835
• Original supporting opinion: 395.0835 PDF

Original ruling text

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum
395.0835

To:

G. M. Swan
Van Nuys District

From:

David H. Levine
Tax Counsel

Subject:

H--- F--No Permit

Date:

December 10, 1986

This is in response to your memo to Tax Counsel Les Sorensen dated October 24, 1986. You ask whether sales or use tax applies to the sale of limited partnership interests in a racehorse. From the Offering Circular submitted with your inquiry, it appears that the limited partnership has not yet purchased the horse. If this is true and the partnership owns no other tangible personal property, then sales of limited partnership interests are not subject to sales or use tax since transfers of those interests involve no transfer of tangible personal property. For the remainder of this opinion, I assume that the partnership owns tangible personal property at the time of the transfer of limited partnership interests. Shares of a corporation are intangible representations of ownership in that corporation. (Cf. Rev. & Tax. Code §§ 6006.5(b), 6281 (for purposes of these sections, shareholders are regarded as having the ultimate ownership of the property of the corporation).) thus, the transfer of shares in a corporation is not subject to sales or use tax. Limited partnership interests are similar to shares of a corporation. (see generally Corporations Code §§ 15501 et seq., 15611 et seq.) A limited partner generally is not liable for any obligation of a limited partnership unless he is named as a general partner or he particpates in the control of the business. (Corporations Code § 15632(a).) A limited partner has certain rights, such as a right to reports and other information. (Corporations Code § 15634.) But a limited partner has not interest in specific partnership property and has not right to receive property other than money upon any distribution unless otherwise specified in the partnership agreement (here, there is no specification otherwise). (Corporations Code §§ 15636, 15671.)

Van Nuys District (GMS)

-2-

December 10, 1986
395.0835

Based on the above considerations, we consider the interests of the H--- F--Associates V limited partners to be intangible personal property. (Accord, Van Arsdale v. Claxton (S.D. Cal. 1975) 391 F.Supp. 538 (limited partnership interests are considered to be within the definition of the term securities under both Federal and California Security Acts).) Therefore, the sale of these limited partnership interests are not subject to sales or use tax provided that the limited partner whose interest is sold has not taken any action which destroys his status as a limited partner (making him, in effect, a general partner). If you have further questions, feel free to write us again.

DHL:ss

bc:

395.0835.doc

Don Hennessy
Les Sorensen