Was equipment transferred by partners to a newly formed partnership subject to sales tax?

Plain-English summary

Tax Counsel R. G. Hamlin distinguished between contributing property to a new partnership or joint venture and selling property to it. His internal memorandum answered an auditor's question about partners transferring equipment when a partnership formed.

No sales tax applied when a partner transferred equipment as a capital contribution and received an interest in the partnership or joint venture. By contrast, a transfer for cash or other consideration that did not represent an ownership interest was a sale subject to tax, unless the transferring partner was not a seller.

The memorandum based this distinction on Sales Tax General Bulletin 48-8, dated March 23, 1948. Its subject line separately says Application of Ruling 81, but the body does not explain how Ruling 81 relates to the answer.

Internal request chain, two missing authorities, rule boundary, and absent transaction

Auditor V. G. Robinson wrote a memorandum dated May 1, 1950, attached to W. C. Shay's May 2 memorandum to the legal office. The source does not state the year of Shay's May 2 memorandum and includes neither document. It supplies no taxpayer, partner, partnership, venture, equipment, formation date, transfer, agreement, value, tax basis, capital account, cash, other consideration, seller's permit, return, audit, assessment, or actual dispute.

Hamlin said General Bulletin 48-8 governed partnership formation. A property transfer by way of contribution to the capital generated no sales-tax liability. The source does not define the interest, require simultaneous contributions, state a percentage, or address liabilities, debt relief, property exchanges, distributions, later ownership changes, or existing entities.

A partner's property sale to the partnership for cash or other consideration not representing a business interest was taxable unless the transferor was not a seller. The source gives no seller definition, seller-status facts, permit facts, occasional-sale analysis, consideration valuation, tax measure, rate, exemption, or result for a named party.

The live annotation reproduces essentially the full operative distinction and corrects the source's printed transferer spelling to transferor. It omits the internal auditor and Shay memorandum chain; Ruling 81 subject line; General Bulletin date and missing-text limitation; absence of specific transaction facts; and lack of a return, audit, assessment, payment, appeal, or outcome.

What this means for you

Owners forming a partnership or joint venture

The form of consideration mattered. Receiving an ownership interest for contributed property produced a different result from receiving cash or another non-ownership benefit.

Accountants and tax professionals

Document the entity's formation, transferred equipment and value, ownership interest, capital-account entry, every cash or nonownership benefit, and the transferor's seller and permit status. Obtain the governing current authority rather than treating the missing 1948 bulletin or 1951 internal memorandum as a safe harbor.

Common questions

Q: Was a property contribution for a partnership interest taxable?

A: No, under the memorandum's application of General Bulletin 48-8.

Q: What if the partnership paid the partner cash?

A: Staff treated that as a taxable sale rather than a capital contribution.

Q: Did all non-ownership consideration produce tax?

A: The memorandum said tax applied unless the transferor was not a seller.

Q: Did the guidance also cover joint ventures?

A: Yes. It applied the same capital-contribution distinction to a joint venture.

Q: What did Ruling 81 say?

A: The memorandum's subject names it, but the source includes no Ruling 81 text or explanation.

Q: Is General Bulletin 48-8 included?

A: No. The memorandum cites its March 23, 1948 date and states the rule attributed to it.

Q: Did the memorandum decide a named partnership's tax?

A: No. It gives general internal guidance and supplies no specific transaction or outcome.

Citations and references

• California Sales Tax General Bulletin 48-8, dated March 23, 1948, as cited in the memorandum
• Historical California Sales and Use Tax Ruling 81 — named in the subject line but not explained or included
• Auditor V. G. Robinson's May 1, 1950 memorandum and W. C. Shay's May 2 memorandum — described but not included
• Party, partnership, venture, equipment, formation, transfer, ownership-interest, capital-account, consideration, seller, permit, return, audit, assessment, payment, claim, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official May 25, 1951 R. G. Hamlin memorandum:

We believe that the application of the tax to the formation of a partnership is governed by Sales Tax General Bulletin 48-8, dated March 23, 1948.

As therein indicated, there is no sales tax liability upon the transfer of the property to a joint venture or partnership by way of contribution to the capital of the venture or partnership.

The tax does apply, however, to a sale of property to the partnership by a partner for cash or other consideration not representing an interest in the business, unless the transferer is not himself a “seller”.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1960
• Original supporting opinion: 395.1960 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

MR. W. C. Shay (HHW)

From:

R. G. Hamlin

Subject:

Application of Ruling 81

395.1960
Sacramento
May 25, 1951

In a memorandum written by Auditor V. G. Robinson, dated May 1, 1950, attached to your memorandum to this office of May 2, he asked about the application of the tax to transfers of equipment to a partnership by the partners upon the formation of the partnership. We believe that the application of the tax to the formation of a partnership is governed by Sales Tax General Bulletin 48-8, dated March 23, 1948. As therein indicated, there is no sales tax liability upon the transfer of the property to a joint venture or partnership by way of contribution to the capital of the venture or partnership. The tax does apply, however, to a sale of property to the partnership by a partner for cash or other consideration not representing an interest in the business, unless the transferer is not himself a “seller”.

R. G. Hamlin
Tax Counsel

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