Were a wine-business contribution to a new partnership and a later partnership-interest sale taxable when counsel found the 80/80 test met and the parties said tax avoidance was not the only purpose?

Plain-English summary

California corporation G and Delaware corporation P proposed a California general partnership. The opinion says G would contribute $990 and P $10; P would buy a 1-percent real-estate interest from G, and both would contribute their combined real estate, leaving G with 99 percent and P with 1 percent.

G would then contribute a wine business representing at least 80 percent of its relevant tangible personal property. The partnership would issue G an additional interest and assume liabilities. Immediately afterward, P would buy enough of G's partnership interest for the parties to become 50/50 owners.

The letter concurred that no sales or use tax applied to the one-percent real-estate transfer, the partners' real-estate contribution, or G's partnership-interest sale to P. It said the wine-business contribution met Regulation 1595's 80-percent property and 80-percent ownership tests. Each step was analyzed independently because the parties represented that sales-and-use-tax avoidance was not the only purpose; the source identifies no other purpose.

Four proposed stages, source defects, live reversal, and missing record

The June 19, 1989 request is not included. The lawyer and company names are redacted beyond G and P. The source supplies no articles, shareholder records, partnership agreement, formation filing, cash ledger, bank statement, real-estate description or deed, appraisal, wine-business asset schedule, seller's permit, liability ledger, partnership-interest valuation, purchase agreement, closing, or tax filing.

Stage one formed the partnership with $990 from G and $10 from P. The source says P's $10 was 1/99 of G's contribution. No payment, unit count, capital account, profit or loss allocation, governance right, or formation date appears.

Stage two had P buy one percent of unspecified real estate from G, followed immediately by both corporations contributing 100 percent of their combined real-estate interests. G then held 99 percent and P one percent of the partnership. The source gives no property, price, cash payment, value, deed, mortgage, title, transfer tax, basis, rent, or contribution record.

Stage three transferred G's Wine Business. The partnership would issue G an additional interest taking it above 99 percent and assume unspecified G liabilities and obligations. The source sentence prints, The Wine Business compromises 80% or more wine or the tangible personal property held or used by [G]. The live annotation renders this as 80 percent of the business's tangible personal property. The official text does not resolve its apparent compromises and wine or defects, so this page reports the intended test only as counsel's later statement that the 80/80 requirements were met.

G held a seller's permit, so counsel said Regulation 1595(b)(2) required both 80 percent or more of relevant property transferred and 80 percent or more ultimate ownership unchanged. Immediately after the contribution, G held above 99 percent, and counsel said the test was satisfied. No numerator, denominator, asset values, excluded property, share calculation, liability amount, tax measure, or workpaper appears.

Stage four occurred immediately afterward: P would pay cash to buy enough of G's partnership interest to reach 50 percent. The source gives no purchase percentage before rounding, price, valuation, payment, agreement, distribution rights, or closing. Counsel analyzed that later sale separately rather than using the final 50/50 ownership to recharacterize the preceding asset contribution.

The parties represented that the series was not structured solely to avoid California sales and use tax. Counsel therefore said independent analysis was appropriate when the business purpose was not tax avoidance only. The source does not identify, explain, evidence, or test any affirmative real-estate, wine-business, governance, financing, operational, regulatory, accounting, or commercial purpose.

The live annotation reverses the source's formation cash amounts, saying P contributed $990 and G $10, even while preserving G's later 99-percent interest. This page follows the complete opinion. The live entry otherwise preserves the real-estate sequence, Wine Business, seller's permit, assumed liabilities, later 50/50 purchase, 80/80 explanation, Regulation 1595(b)(2), and date. It omits the source wording defects; no affirmative business purpose; missing values, liabilities, records and computations; and absence of completed transactions or later tax outcome.

What this means for you

Businesses forming joint partnerships

A later ownership change did not automatically collapse the earlier asset contribution when counsel analyzed each step independently and the parties represented that sales-and-use-tax avoidance was not the only purpose. The source does not identify what that other purpose was.

Accountants and tax professionals

Document every cash and property transfer, the tangible-property numerator and denominator, ownership immediately after each step, assumed liabilities, partnership-interest values, the actual nontax purpose, and the formation and closing sequence.

Common questions

Q: Who contributed $990 and who contributed $10?
A: The complete source says G contributed $990 and P contributed $10; the annotation summary reverses them.

Q: What was the critical sales-tax test?
A: The wine-business contribution had to satisfy Regulation 1595(b)(2)'s 80-percent property and 80-percent ownership requirements.

Q: Did the immediate move to 50/50 ownership invalidate the contribution?
A: No. The letter analyzed the later partnership-interest purchase as a separate step.

Q: Why were the steps not recharacterized?
A: The parties represented that the transaction was not structured solely to avoid California sales and use tax. The source identifies no other purpose.

Q: What Wine Business property made up the 80-percent test?

A: The source does not say. Its sentence is textually defective, and no asset schedule, values, numerator, or denominator is supplied.

Q: How much liability did the partnership assume?

A: The source gives no amount, creditor, terms, or tax allocation.

Q: How much did P pay to reach 50 percent?

A: The source says cash but supplies no price or valuation.

Q: Did the proposed series close?

A: The source does not say.

Citations and references

• California Sales and Use Tax Regulation 1595(b)(2)
• June 19, 1989 request — described but not included
• Corporate, partnership, cash, real-estate, Wine Business, seller-permit, asset, value, liability, ownership, partnership-interest, business-purpose, agreement, closing, return, audit, assessment, payment, claim, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official July 18, 1989 Gary J. Jugum opinion:

[G] will contribute to the Partnership a relatively small amount of cash (currently contemplated to be $990); [P] will contribute 1/99 of [G]’s contribution (currently contemplated to by $10).

Since [G] holds a seller’s permit, the transfer must meet the 80% / 80% requirements of the regulation. The transfer in question meets the test.

Each step of the transaction is properly analyzed independently of all other steps.

It is inappropriate to recharacterize the transaction for sales and use tax purposes, where the business purpose for the transaction is not sales and use tax avoidance only.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1964
• Original supporting opinion: 395.1964 PDF

Original ruling text

395.1964

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-3723

July 18, 1989

Mr. R--- M. J--[H]
Lawyers
XXXXX --- Boulevard
--- ---, CA XXXXX-XXXX
Dear Mr. J---:
This is in response to your letter of June 19, 1989. We apologize for the extended delay in our reply. You have sought our opinion as to the sales and use tax consequence of the following described transactions:
[G], Inc., a California corporation (“[G]”) and [P], Inc., a Delaware corporation (“[P]”) propose to form a general partnership (the “Partnership”) pursuant to California law. [G] will contribute to the Partnership a relatively small amount of cash (currently contemplated to be $990);
[P] will contribute 1/99 of [G]’s contribution (currently contemplated to by $10). [P] will then purchase from [G] a 1% interest in certain real estate (the “Real Estate”), immediately following which [G] will contribute 100% of their combined interests in the Real Estate to the Partnership. Thus, immediately following the transactions described above, (a) the assets of the Partnership will consist of cash and the Real Estate, (b) [G] will have a 99% interest in the Partnership, and (c) [P] will have a 1% interest in the Partnership.
[G] will then contribute to the Partnership certain assets (the “Wine Business”). As consideration for the transfer of the Wine Business to the Partnership, the Partnership will issued to
[G] an additional partnership interest, which will bring [G]’s interest in the partnership to in excess of 99%. The Partnership will also assume certain liabilities and obligations of [G]. The Wine Business compromises 80% or more wine or the tangible personal property held or used by [G].

Mr. R--- M. J---

-2-

July 18, 1989
395.1964

Immediately following the transfer of the Wine Business to the Partnership, [P] will purchase, for cash, an interest in the Partnership from [G] to bring [P]’ Partnership interest up to 50%. You have represented that these transactions were not structured solely to avoid California sales and use tax. We hereby concur in your analysis and conclusions that neither sales tax nor use tax applies to (1) the transfer of the Real Estate by [G] to [P], (2) the transfer by [G] and [P] of the Real Estate to the Partnership, and (3) the transfer of the Partnership Interest by [G] to [P]. The most critical point of our analysis is that our Regulation 1595(b)(2) applies to the transfer of the tangible personal property from [G] to the Partnership. Since [G] holds a seller’s permit, the transfer must meet the 80% / 80% requirements of the regulation. The transfer in question meets the test. Each step of the transaction is properly analyzed independently of all other steps. It is inappropriate to recharacterize the transaction for sales and use tax purposes, where the business purpose for the transaction is not sales and use tax avoidance only. Very truly yours,

Gary J. Jugum
Assistant Chief Counsel

GJJ:sr