Could a houseboat move from a rental partnership to its partners and then to a new corporation without sales or use tax?

Plain-English summary

A partnership rented a houseboat, its only asset, and paid use tax on rental receipts. The October 6, 1988 request said the partners intended to transfer their partnership interests to a corporation for stock. Tax Counsel David H. Levine said that description was not entirely clear and inferred two steps: the partnership would distribute pro rata houseboat interests to the partners, then each partner would exchange that houseboat interest for corporate stock.

The letter explained that the general occasional-sale statute excluded vessels. But the first transfer qualified under the vessel-specific section 6281 exemption because all business property moved and each partner retained the same ultimate ownership percentage.

The second transfer to the corporation was nontaxable if the partners received only proportionate first-issue stock. If the corporation also assumed liabilities or provided other consideration, that consideration would be taxable unless the transfer independently met section 6281's at-least-80-percent property and substantially-similar-ownership conditions.

Unclear request, two conditional transfers, live difference, and missing record

The request was dated October 6 and reached the Board on October 27, but it is not included. The addressee and firm are redacted. The source gives no partnership or partner identity, partner count, percentage, formation or operating agreement, houseboat identity, title, registration, value, basis, acquisition, tax-paid cost, rental receipts, use-tax amount, return, customer agreement, debt, lien, or corporate identity or charter.

The request described a partnership-interest transfer for stock. Levine instead analyzed an apparent two-step property transaction because the mechanics were unclear. No distribution resolution, bill of sale, title transfer, stock-subscription agreement, stock certificate, closing record, or evidence that either proposed step occurred appears.

For step one, section 6367's occasional-sale exemption did not apply because it excludes vessels. Section 6281 could apply because the houseboat was all of the partnership's business property and each partner would receive the same pro rata houseboat ownership that the partner held indirectly through the partnership. Regulation 1595(b)(2) supported that real-or-ultimate-ownership analysis.

For step two, Regulation 1595(b)(4) meant no sales or use tax if each partner received no consideration other than the corporation's first issue of stock. The source does not establish whether the stock was a first issue, whether it was the only consideration, how many shares were issued, or whether share percentages matched the former houseboat percentages.

If the corporation assumed a partner's liability or supplied some other consideration, that consideration would measure tax unless section 6281 independently exempted the transfer. That alternative required the houseboat transfer to be part of at least 80 percent of the tangible personal property each partner held or used in that partner's business activities, plus stock proportionate to the partner's former houseboat interest. The source gives no partner-level property inventory, values, denominator, percentage calculation, liabilities, or other consideration.

The live annotation says an assumption of the corporation's liabilities; the supporting letter instead says an assumption of liability by the corporation, making liability assumed from the partners a possible consideration. This page follows the letter and reports the live reversal. The live entry otherwise preserves the houseboat-only partnership, rental-receipt use tax, pro rata first distribution, first-issue-stock condition, 80-percent alternative, proportionate ownership, sections 6281 and Regulation 1595, and date. It omits the unclear request and inferred mechanics; sections 6006.5(b) and 6367; precise regulation subdivisions; unknown other consideration; missing records; and absence of completion or a later tax outcome.

What this means for you

Vessel-rental partnerships reorganizing as corporations

Vessels require their own exemption analysis; the general occasional-sale rule may expressly exclude them.

Accountants and tax professionals

Start with the actual legal steps rather than an intended shorthand. Track each partner's percentage through both transfers, test the 80-percent threshold separately for every partner, establish whether stock is a first issue, and value any assumed liability or other consideration.

Common questions

Q: Why did the general occasional-sale exemption not apply?
A: Section 6367 expressly excluded vessels such as the houseboat.

Q: What protected the partnership-to-partner distribution?
A: Section 6281, because the houseboat was all partnership business property and ownership percentages stayed the same.

Q: What protected the transfer to the corporation?
A: Receipt solely of proportionate first-issue stock under the commencing-corporation rule.

Q: What if the corporation assumed debt?
A: The debt would be consideration unless the transfer separately satisfied the vessel-specific section 6281 exemption.

Q: Did the request clearly propose the two property transfers counsel analyzed?

A: No. It described a partnership-interest-for-stock transaction. Counsel said it was not entirely clear and inferred the distribution and contribution steps.

Q: Did the opinion establish that stock was the only consideration?

A: No. The source expressly says other consideration was unclear.

Q: Was the 80-percent condition satisfied for each partner?

A: The opinion assumes that condition for its alternative conclusion but supplies no partner property schedules, values, or calculations.

Q: Did either proposed transfer occur?

A: The source does not say.

Citations and references

• California Revenue and Taxation Code §§ 6006.5(b), 6281, and 6367
• California Sales and Use Tax Regulation 1595(b)(2) and (b)(4)
• October 6, 1988 request, received October 27 — described but not included
• Party, partnership, corporation, houseboat, title, registration, value, rental, tax, ownership, property-percentage, liability, consideration, stock, distribution, closing, return, audit, assessment, payment, claim, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official November 18, 1988 David H. Levine letter:

Although it is not entirely clear from your letter, it appears that the transfer will occur in two steps.

Since the only asset of the partnership is the houseboat, its transfer will be all of the property held in the course of business activities of the partnership.

If the individual partners receive no consideration upon their transfer of the houseboat to the corporation other than the first issue of stock of that corporation, there would be no sales or use tax applicable to the transfer.

If, however, there is some consideration received by the partners such as an assumption of liability by the corporation, then that consideration will form the measure of tax unless the transfer qualifies for the Section 6281 exemption discussed above.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1783
• Original supporting opinion: 395.1783 PDF

Original ruling text

395.1783

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-5550

November 18, 1988

Ms. L--- L. F----- & --XXX --- ---, Suite XXX
---, CA XXXXX
Dear Ms. F---:
This is in response to your letter dated October 6, 1988 sent to us on October 27, 1988, regarding the application of sales or use tax to a transfer between related entities. Your client is a partnership which operates a houseboat rental business, the only asset of which is the houseboat. The partnership pays use tax on the rental revenue. The partners now intend to transfer their partnership interests to a corporation in exchange for stock. Although it is not entirely clear from your letter, it appears that the transfer will occur in two steps. It appears that each partner will obtain his or her pro rata share of the partnership assets in a transfer from the partnership. It appears that each partner will then transfer his or her interest in the houseboat to the corporation in exchange for the corporate stock. It is not clear whether any other consideration is involved in these transfers. You refer to the exemption from sales tax provided by Revenue and Taxation Code Section 6367 for “occasional sales” as defined by Section 6006.5(b). Section 6367 specifically excludes from its purview transfers of vessels, such as the houseboat in question. The exemption that may be relevant to this transaction is provided by Section 6281. As relevant here, that section exempts transfers of vessels from sales or use tax when the vessel is included in a transfer of all or substantially all the property held or used in the course of business activities of the person selling the property when after such transfer the real or ultimate ownership of such property is substantially similar to that which existed before such transfer. For purposes of this section, stockholders and partners are regarded as having the real or ultimate ownership of the property of that corporation or partnership.

L--- L. F---

-2-

November 18, 1988
395.1783

Since the only asset of the partnership is the houseboat, its transfer will be all of the property held in the course of business activities of the partnership. Since each partner will own the same percentage of ownership in the houseboat after the transfer as that partner owned in the partnership, the ultimate ownership will be substantially similar to that which existed before the transfer. (See Reg. 1595(b)(2).) Thus, the transfer will qualify for the Section 6281 exemption. If the individual partners receive no consideration upon their transfer of the houseboat to the corporation other than the first issue of stock of that corporation, there would be no sales or use tax applicable to the transfer. (Reg. 1595(b)(4).) If, however, there is some consideration received by the partners such as an assumption of liability by the corporation, then that consideration will form the measure of tax unless the transfer qualifies for the Section 6281 exemption discussed above. Assuming the transfer to the corporation is part of a transfer of at least 80% of the tangible personal property held or used by each of the individual partners in the course of their business activities, and assuming that the stock they receive in the corporation is proportionate to the ownership interest each held in the houseboat, the transfer would qualify for the Section 6281 exemption. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Tax Counsel

DHL:ss