Did retaining land and a building prevent a partnership's incorporation from meeting the all-or-substantially-all asset test?

Plain-English summary

A partnership transferred all assets to a newly formed corporation except a building and land representing about 22.5 percent of total partnership assets. The corporation gave the partnership a note and assumed accounts payable and accrued liabilities. No amounts are provided.

Ten percent of corporate stock went to a person who had not been a partner. The partners received the other 90 percent in the same proportions as their partnership-asset holdings.

Board staff said real property was not considered when deciding whether the partnership transferred all or substantially all property held or used in a seller-permit activity. Because every asset other than the building and land moved, the transaction met that requirement of section 6006.5(b).

Staff also treated post-transfer ownership as substantially similar. The former partners were ultimate owners of 90 percent of corporate property in the same proportions in which they had held partnership property. The memorandum supplies no audit action or tax outcome.

Internal audit advice, consideration, two findings, and source limits

Headquarters Sales Tax Counsel John H. Murray sent the January 24, 1955 memorandum to San Diego Auditing about E--- R. B--- and I--- H---, P--- S---. The address and account are redacted. The source does not say whether those names identify the partners, partnership, or both.

San Diego advised that the partnership had completed a transfer to a newly formed corporation. It retained only land and a building, described as approximately 22½ percent of the partnership assets. The source spells approximated as appoximated; it supplies no appraisal, land value, building value, remaining asset value, asset count, allocation, or date used for the percentage.

The corporation issued a note to the partnership and assumed accounts payable and accrued liabilities. The PDF gives no note principal, interest, maturity, security, payment record, payable schedule, accrued-liability schedule, other consideration, or measure attributed to tangible personal property.

For section 6006.5(b)'s property requirement, staff said real property was not considered when identifying all or substantially all property held or used in a seller-permit activity. Because every asset other than the building and land transferred, Murray treated the requirement as met. The source does not identify the partnership's activity, permit, personal property, location, or property use.

For ownership, a nonpartner received 10 percent of corporate stock. Former partners received 90 percent in the same ratio as their partnership holdings. Staff regarded those former partners as ultimate owners of 90 percent of the corporation's property and held ownership substantially similar. The source gives no partner count, individual percentages, capital accounts, stock shares or classes, voting rights, nonpartner identity, valuation, or attribution calculation.

The memorandum says only that both section 6006.5(b) requirements were met. It does not state a complete tax conclusion, address how the note or assumed liabilities affected other questions, or provide an audit adjustment, return, assessment, payment, refund, administrative action, appeal, or later outcome.

The live annotation preserves the exclusion of real property, all assets except land and building, new corporation, 90-percent continuity, prior ownership, and section 6006.5(b) conclusion. It omits the internal San Diego audit posture and subjects; redacted account; 22½-percent figure and source typo; note, accounts payable, and accrued liabilities; 10-percent stock issued to a nonpartner; same-ratio detail; both missing asset and ownership records; narrow scope of the two findings; and absent tax or audit outcome.

What this means for you

Partnerships incorporating a business

Under this memorandum, retained real estate did not count against the substantially-all test for property used in a seller-permit activity.

Accountants and tax professionals

Track real and personal property separately, quantify assumed liabilities and other consideration, and compare ultimate ownership proportions before and after transfer.

Common questions

Q: What property did the partnership keep?
A: Its building and land, about 22.5% of total partnership assets.

Q: Did staff count that real property in the substantially-all test?
A: No.

Q: How much of the corporation did the former partners own?
A: 90%, in the same proportions as their earlier partnership ownership.

Q: Who received the remaining stock?
A: A person who had not been a partner received 10%.

Q: What consideration did the corporation provide?

A: A note plus assumption of accounts payable and accrued liabilities. The source gives no amounts or terms.

Q: Did the memorandum say the entire transaction was tax-exempt?

A: It says the property and ownership requirements of section 6006.5(b) were met but supplies no broader tax conclusion, audit adjustment, or later outcome.

Q: What assets and business were involved?

A: Other than retained land and a building, the source identifies no asset, business activity, permit, location, or value.

Citations and references

• California Revenue and Taxation Code § 6006.5(b)
• San Diego audit advice and transfer record — summarized but not included
• Partnership, partner, nonpartner, asset, real-property, appraisal, note, payable, accrued-liability, consideration, permit, ownership, stock, tax, audit-action, administrative, and outcome records — described or implicated but not included

Verbatim support

From the official January 24, 1955 John H. Murray memorandum:

In determining whether all or substantially all of the property held or used in connection with an activity for which a seller’s permit is required, we do not take into consideration real property.

Under the facts given, we would also consider that the ownership of the property is substantially similar to that which existed before the transfer because the ultimate owners of 90% of the corporation’s property were the owners of all of the property prior to the transfer and their ownership of that 90% is in the same proportion as was their ownership of the partnership property.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1500
• Original supporting opinion: 395.1500 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

395.1500
Sacramento, California
January 24, 1955

To:

San Diego – Auditing (RWS)

From:

Headquarters – Sales Tax Counsel (JHM)

Subject:

E--- R. B--- & I--- H--P--- S--XXX --- Avenue
--- --- X, California

Account No. F-X-XXXXX

You advise us that the above partnership transferred to a newly formed corporation all of its assets except building and land which appoximated 22 ½% of the partnership assets. A note was given by the corporation to the partnership and the corporation also assumed accounts payable and accrued liabilities. 10% of the stock of the corporation was issued to a person who was not a member of the partnership but the remaining stock was issued to the partners in the same ratio as their holdings of partnership assets. In determining whether all or substantially all of the property held or used in connection with an activity for which a seller’s permit is required, we do not take into consideration real property. Thus, in the above transaction we would consider the all or substantially all requirement of Section 6006.5(b) to be met. Under the facts given, we would also consider that the ownership of the property is substantially similar to that which existed before the transfer because the ultimate owners of 90% of the corporation’s property were the owners of all of the property prior to the transfer and their ownership of that 90% is in the same proportion as was their ownership of the partnership property.

John H. Murray

JHM:ja