Did transferring a sole proprietorship's fixed assets to a limited partnership preserve substantially similar ultimate ownership?

Plain-English summary

G--- H. D--- sold fixed assets from a sole proprietorship to a limited partnership and argued that real or ultimate ownership remained substantially similar under section 6006.5(b). Associate Tax Counsel John H. Knowles concluded that the new limited partner's proprietary interest changed ownership and recommended denying the redetermination petition.

Under the former statutes quoted and cited, the limited partner was not personally bound by partnership obligations while avoiding control and had no management voice. But the partner could inspect and copy books, receive full information, seek judicial dissolution and winding up, obtain return of a contribution subject to statutory conditions, assign a personal-property partnership interest, and have that interest charged by creditors through a court.

Those rights created a proprietary interest in partnership assets. Counsel therefore found that the fixed-asset sale changed real or ultimate ownership and fell outside section 6006.5(b). The source gives no tax measure or final Board decision.

Petition posture, former statutory rights, printed wording, and missing record

Knowles sent the letter to W--- G. N---, a public accountant acting for taxpayer G--- H. D--- in petition AP-XXXXX. The source does not identify the business, limited partnership, limited partner, other partners, tax period, determination, disputed amount, or petition content.

Section 6006.5(b), quoted in the letter, included a transfer of all or substantially all activity property when real or ultimate ownership remained substantially similar. It treated shareholders, bondholders, partners, and other entity interest holders as the real or ultimate owners of entity property. The source does not identify the quantity or value of assets transferred, retained property, sale date, consideration, or whether the all-or-substantially-all limb was disputed.

The question was whether a sale from a sole proprietorship to a limited partnership changed ownership. The letter gives no ownership percentage, cash, debt, assumed liability, capital contribution, profit or loss share, distribution priority, liquidation terms, partnership agreement, certificate, or asset schedule.

Knowles relied on former California Corporations Code sections 15501 and 15507 for limited-liability protection while the limited partner avoided business control. Former section 15510 supplied book-inspection, information, and judicial dissolution and winding-up rights; section 15516 governed contribution return; section 15518 called the interest personal property; section 15519 permitted assignment; and section 15522 permitted a judicial creditor charge. The actual statutory texts are not included beyond counsel's descriptions.

The conclusion says the limited partner lacked a management voice and personal partnership-debt liability but had a proprietary interest in partnership assets under the Uniform Limited Partnership Act. Because that interest did not exist when the sole proprietor owned the fixed assets alone, counsel found an ownership change.

The rendered PDF's concluding sentence says from sold proprietorship to the limited partnership. The opening question and live annotation say sole proprietorship; this page reports the contextual reading while preserving sold in the source tail.

Knowles recommended denial rather than documenting final Board action. He offered an oral Board hearing on request within 30 days and said Board hearings occurred monthly in Sacramento. A final note says two attached copies of an approved July 31, 1963 Report of Hearing Officer concerned a June 11 Pasadena hearing. No copy appears in the official PDF.

The source supplies no hearing notice, transcript or exhibits; Hearing Officer report; petition; taxpayer or Department contentions beyond the ownership question; partnership or sale records; asset and valuation evidence; determination, rate, jurisdiction or tax; 30-day response; later Board hearing; minutes or order; payment, refund, collection, appeal, or outcome.

The live annotation preserves the sole-proprietorship asset sale, limited partnership, ownership-change conclusion, limited partner's substantial rights, and August 7, 1963 date. It omits the taxpayer, accountant and petition number; section 6006.5(b) quotation; each former Corporations Code section and specific right; management and liability qualifications; fixed-asset description; Uniform Limited Partnership Act; printed sold proprietorship wording; denial recommendation; 30-day hearing option; June 11 hearing and July 31 approved report; missing records; tax measure; and absent final outcome.

What this means for you

Sole proprietors adding limited partners

Under this historical recommendation, lack of management power and personal-liability protection did not eliminate a limited partner's proprietary interest. Information, dissolution, contribution, transfer, and creditor rights still changed ultimate ownership.

Accountants and tax professionals

Review every partner's capital, profits, distributions, liquidation, information, management, assignment, creditor, and contribution-return rights rather than focusing only on control or liability protection.

Common questions

Q: Was the limited partner personally liable for partnership debts? A: Not under the conditions described in the historical statute.

Q: Could the limited partner manage the business?
A: The letter said the partner could not take part in control while retaining the cited liability protection.

Q: What rights made the partner an owner?
A: Information, dissolution, contribution-return, assignment, and creditor-reachable property rights.

Q: What did counsel recommend?
A: Denial of the petition, with a Board hearing available on request.

Q: How much ownership did the limited partner receive?

A: The source does not say. It gives no percentage, capital account, contribution, profit share, distribution right, or partnership agreement.

Q: Did the sale transfer all or substantially all business property?

A: The letter frames the dispute under section 6006.5(b) and identifies fixed assets, but gives no asset schedule, retained property, values, or separate finding on that limb.

Q: Was the petition finally denied?

A: The source does not establish that. Counsel recommended denial and offered a Board hearing, but supplies no response, final order, payment, appeal, or outcome.

Q: What was attached to the letter?

A: Two copies of an approved July 31, 1963 Hearing Officer report about a June 11 Pasadena hearing. Neither copy is in the official PDF.

Citations and references

• California Revenue and Taxation Code § 6006.5(b)
• Former California Corporations Code §§ 15501, 15507, 15510, 15516, 15518, 15519, and 15522
• Uniform Limited Partnership Act — identified as the statutory framework
• July 31, 1963 approved Report of Hearing Officer, two copies — listed as attached but absent
• Partnership, ownership, contribution, management, asset, sale, consideration, liability, valuation, audit, determination, hearing, Board, payment, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official August 7, 1963 John H. Knowles letter:

The question presented in this case was whether the sale from a sole proprietorship to a limited partnership involved any change in the real or ultimate ownership of the business assets. We are of the opinion that it does.

More important, section 15518 specifically states a limited partner’s interest in a partnership is personal property. This property interest may be assigned (§ 15519) and his creditors may obtain a charge on the interest by application to a court of competent jurisdiction (§ 15522).

Accordingly, even though the limited partner is not entitled to a voice in management and is not personally liable for the debts of the partnership, he has, under the Uniform Limited Partnership Act, a proprietary interest in the partnership assets.

We regret that we must recommend that the petition be denied.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1620
• Original supporting opinion: 395.1620 PDF

Original ruling text

395.1620

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

August 7, 1963

Mr. W--- G. N--Public Accountant
XXX --- --- Avenue
--- X, California

AP- XXXXX
G--- H. D---

Dear Mr. N---:
This is to inform you of our recommendation to the board as respects the above named taxpayer’s petition for redetermination. We regret that we must recommend that the petition be denied. As you know, section 6006.5(b) of the California Sales and Use Tax Law provides: “‘Occasional sale’ includes: (b) Any transfer of all or substantially all the property held or used by a person in the course of such an activity when after such transfer the real or ultimate ownership of such property is substantially similar to that which existed before such transfer. For the purposes of this section, stockholders, bondholders, partners, or other persons holding an interest in a corporation or other entity are regarded as having the ‘real or ultimate ownership’ of the property of such corporation or other entity.” The question presented in this case was whether the sale from a sole proprietorship to a limited partnership involved any change in the real or ultimate ownership of the business assets. We are of the opinion that it does. While the limited partner is not personally bound by the obligations of the partnership (Corporation Code § 15501) as long as he does not take part in the control of the business (§ 15507), he nevertheless has substantial rights in the partnership. He has a right to inspect and copy the books, receive true and full information on things affecting the partnership and a right to dissolution and winding up by decree of court (§ 15510). He has a right to the return of his contribution subject to the conditions set forth in section 15516. More important, section 15518 specifically states a limited partner’s interest in a partnership is personal property. This property interest may be assigned (§ 15519) and his creditors may obtain a charge on the interest by application to a court of competent jurisdiction (§ 15522).

Mr. W--- G. N--Re: -- - XXXXX

-2-

August 7, 1963
395.1620

Accordingly, even though the limited partner is not entitled to a voice in management and is not personally liable for the debts of the partnership, he has, under the Uniform Limited Partnership Act, a proprietary interest in the partnership assets. Therefore, the sale of the fixed assets of the business from sold proprietorship to the limited partnership entailed a change in the real or ultimate ownership, and petitioner does not come within section 6006.5(b). If you disagree with our conclusions and desire an oral hearing before the board, you may have one on request. Please let us know within thirty days so that we may make the necessary arrangements. Board hearings are held monthly in Sacramento. Very truly yours,

John H. Knowles
Associate Tax Counsel

JHK:o’b
cc:

Pasadena – Subdistrict Administrator

Attached are two copies of the Report of Hearing Office dated July 31, 1963, which has been approved. The hearing was held in Pasadena on June 11, 1963.