Was a limited partnership's sale of one branch plant's equipment to a commonly owned corporation an exempt occasional sale?

Plain-English summary

A limited partnership wanted to sell one branch plant's power sewing machines, furniture, fixtures, and other equipment to a corporation. A husband and wife were general partners holding about 80 percent of the partnership; limited partners, primarily relatives, held the balance.

The same spouses owned 80 to 85 percent of the buyer's stock. Other shareholders were friends and relatives, some of whom were also limited partners. The source gives no exact ownership schedule or explanation of the five-percentage-point range.

Board counsel identified three requirements for the section 6006.5(b) occasional-sale exemption: the transfer must cover all or substantially all relevant property; that property must be held or used in an activity requiring a seller's permit; and real or ultimate ownership after the transfer must be substantially similar to ownership before it.

Counsel assumed the permit-activity and ownership-continuity requirements were met. The sale still failed because one branch's equipment was only part of the partnership's relevant property. The proposed sale would therefore be subject to sales tax. The source does not show that it occurred.

Proposed transfer, three-element framework, assumptions, and missing record

Tax Counsel E. H. Stetson wrote on April 7, 1953 to attorney D--- S. M---. The attorney's request had been addressed to Harry L. Say and referred to Stetson. A redacted Auditing recipient was copied. The incoming request is not reproduced.

The proposed seller was a limited partnership. Husband-and-wife general partners together held about 80%; other interests belonged primarily to relatives as limited partners. The proposed corporate buyer was 80 to 85 percent owned by the spouses. Remaining shareholders were friends and relatives, with some overlapping limited partners.

The property consisted of certain power sewing machines, furniture, fixtures, and equipment at a branch plant. The source does not identify the partnership or corporation, business, plant address or function, other plants, property elsewhere, asset count, item use, seller's permit, price, consideration, liabilities, agreement, buyer use, or transfer date.

Stetson described three cumulative requirements under section 6006.5(b): all or substantially all property must transfer; it must be property held or used by a person in a seller-permit activity; and real or ultimate ownership after transfer must be substantially similar to ownership before transfer.

He assumed the property had been held or used in a permit-requiring activity, saying that appeared likely. He also assumed substantially similar ownership. For that ownership inquiry, he said staff usually apply as a rule of thumb the same 80-percent test used under the Internal Revenue Code for tax-exempt organizations. The PDF identifies no Internal Revenue Code provision, calculation, attribution method, stock class, outside holder, value, or reason the corporate ownership range is 80 to 85 percent.

Those assumptions could not satisfy the first requirement. Stetson inferred from the phrase branch plant that the transferred equipment was not all or substantially all property held in the permit activity. The source gives no inventory or percentage calculation for that conclusion and does not say whether staff sought further facts.

The PDF supplies no request, partnership or shareholder agreement, general- or limited-partner schedule, corporate records, stock ledger, attribution analysis, branch or other-property inventory, asset values, appraisals, permits, transaction documents, consideration, closing evidence, return, audit, assessment, payment, refund, administrative action, appeal, or later outcome.

The live annotation preserves the three cumulative elements, the 80-percent ownership parenthetical, branch-plant property, and failure of the first element. It omits the attorney, counsel, referral and audit copy; proposed posture; husband-and-wife partnership and corporate interests; limited partners, friends, relatives, and overlap; the 80-to-85-percent range; sewing machines, furniture, fixtures, and equipment; counsel's express assumptions on ownership and permit use; the Internal Revenue Code rule-of-thumb description; all missing records; and absence of a completed sale or outcome.

What this means for you

Partnerships selling one location's equipment

Under this opinion, ownership overlap could not cure a partial-property transfer. Calling the location a branch indicated that partnership property remained outside the deal.

Accountants and tax professionals

Test every element separately. Map the complete property pool, locations and uses before claiming substantially all, and document exact ownership rather than relying on a range.

Common questions

Q: What property was being sold?

A: Power sewing machines, furniture, fixtures, and other equipment at a branch plant.

Q: Did the owners substantially overlap?

A: Yes. Together the spouses held about 80 percent of the partnership and 80 to 85 percent of the buyer's stock, but the source gives no ownership records or exact calculation.

Q: Why did the exemption fail?

A: The transfer covered branch-plant equipment, not all or substantially all property held or used in the permit activity.

Q: Did counsel definitively decide the ownership-continuity issue?

A: No. The letter assumed substantially similar ownership and still found the transfer taxable on the asset-scope requirement.

Q: Did counsel decide whether the property was used in a seller-permit activity?

A: No. He assumed that requirement and said it appeared likely.

Q: What did the historical 80-percent rule measure?

A: Counsel described it only as staff's ownership rule of thumb borrowed from the Internal Revenue Code for tax-exempt organizations. He gave no Code section or calculation.

Q: Did the proposed sale occur?

A: The source provides no agreement, closing, return, assessment, payment, or later outcome.

Citations and references

• California Revenue and Taxation Code § 6006.5(b)
• Unidentified Internal Revenue Code 80-percent test for tax-exempt organizations — referenced only as a historical rule of thumb
• Attorney request — identified but not included
• Entity, partner, shareholder, stock, attribution, plant, asset, value, permit, transaction, consideration, return, tax, administrative, and outcome records — described or implicated but not included

Verbatim support

From the official April 7, 1953 E. H. Stetson letter:

In order for a transaction to be exempt under section 6006.5(b) there are three necessary elements, each of which must be present.

If we assume that the real or ultimate ownership of the property involved in the proposed transaction is substantially the same after the transaction to that which existed before the transfer (and, in so determining, we usually apply as a rule of thumb, the same 80% test as is used under the Internal Revenue Code for tax exempt organizations) and we assume further that the property was held or used in an activity requiring a seller’s permit (and it would seem that it was), we still have the problem of determining whether the transfer was all or substantially all of the property so held.

In view of the fact that the transfer is of equipment at a branch plant, it is our opinion that the transfer would not meet this last test and therefore would be subject to sales tax.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1360
• Original supporting opinion: 395.1360 PDF

Original ruling text

395.1360

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

April 7, 1953

Mr. D--- S. M--Attorney at Law
XXXX --- --- --- Building
XXX --- ----- --- XX, California
Dear Mr. M---:
Your letter addressed to Mr. Harry L. Say has been referred to me for reply. You request a ruling with respect to the following transaction involving a limited partnership consisting of husband and wife as general partners (whose interest in the same is about 80%), the remainder owned by limited partners who are primarily relatives. This partnership owns certain power sewing machines, furniture, and fixtures and equipment at a branch plant which it desires to sell to a corporation. 80 to 85% of the stock of this corporation is owned by the husband and wife who are the general partners in the limited partnership. The remaining stockholders are friends and relatives who in some instances are the same individuals as the limited partners in the partnership. You request advice as to whether this sale would be exempt from tax as an occasional sale under section 6006.5 of the Sales and Use Tax Law. In order for a transaction to be exempt under section 6006.5(b) there are three necessary elements, each of which must be present. These are (1) the transfer must be of all or substantially all of the property, (2) held or used by a person (which includes partnerships and corporations) in the course of an activity for which he is required to hold a seller’s permit, and (3) after the transfer the real or ultimate ownership of the property transferred is substantially similar to that which existed before the transfer. If we assume that the real or ultimate ownership of the property involved in the proposed transaction is substantially the same after the transaction to that which existed before the transfer (and, in so determining, we usually apply as a rule of thumb, the same 80% test as is used under the Internal Revenue Code for tax exempt organizations) and we assume further that the property was held or used in an activity requiring a seller’s permit (and it would seem that it was), we still have

Mr. D--- S. M---

-2-

April 7, 1953
395.1360

the problem of determining whether the transfer was all or substantially all of the property so held. In view of the fact that the transfer is of equipment at a branch plant, it is our opinion that the transfer would not meet this last test and therefore would be subject to sales tax. Very truly yours,

E. H. Stetson
Tax Counsel

JHM:ja
cc:

--- --- - Auditing