Was a transfer of selected assets from a three-person partnership to a new partnership owned by two of them an exempt occasional sale?

Plain-English summary

Partners A, B, and C each owned one-third of Company X. A and B formed Company Y, each with a one-half interest, and selected capital assets—including tangible personal property—moved from X to Y at formation. Associate Tax Counsel John H. Murray assumed X operated an activity requiring a seller's permit.

Counsel concluded that the transfer was taxable because it met neither requirement of the section 6006.5(b) occasional-sale rule. The selected assets were not all or substantially all property held or used in the permit-requiring activity.

Ultimate ownership also was not substantially similar. The letter said the Board consistently used the same 80-percent rule applied by the United States government to certain tax-exempt reorganizations. Removing C left at most A's and B's former one-third interests common, or two-thirds total—below 80 percent—even though each held half of Y. The source does not show that arithmetic or cite the federal authority.

Assumed permit activity, two failed tests, absent consideration, and no outcome

The May 22 request is not included and gives no year on its quoted date line. The public accountant, partners and partnerships are redacted beyond A, B, C, X and Y. The source supplies no partnership agreement, capital account, formation filing, ownership evidence, business description, customer, sale, seller's permit, return, audit, or assessment.

At Y's creation, certain capital assets moved from X. The source identifies no asset, quantity, location, title, invoice, acquisition, basis, depreciation, value, percentage of X's relevant property, transfer agreement, contribution entry, liability, debt relief, cash, partnership interest issued for the property, or other consideration.

Murray assumed X's activity required a seller's permit. Section 6006.5(b) then required both all or substantially all property held or used in that activity and real or ultimate ownership substantially similar after the transfer. He said the described transfer met neither condition.

The asset test failed because the limited statement appeared to cover only selected capital assets, not all or substantially all relevant property. No numerator, denominator, percentage, excluded asset, inventory, intangible, real property, or valuation is supplied.

The ownership test failed because X had A, B and C at one-third each while Y had only A and B at one-half each. Under a common-interest comparison, A and B could each carry forward no more than the one-third each held before, totaling two-thirds. The source itself states only that ownership was not substantially similar and cites the Board's consistent 80-percent rule.

The opinion calls the transfer subject to sales tax but supplies no consideration analysis, seller conclusion beyond the permit assumption, tax measure, allocation, rate, local tax, invoice, return, payment, audit, assessment, claim, appeal, or later outcome. It also does not say whether X or Y was newly formed in fact, whether assets transferred, or whether the parties changed the plan.

The live annotation preserves three equal X partners, two equal Y partners, selected assets including tangible property, both failed requirements, and date. It omits the seller-permit assumption; section 6006.5(b) citation; 80-percent United States-government analogy; missing request, assets, denominator, consideration and tax measure; and absence of a completed transfer or later outcome.

What this means for you

Partnerships splitting assets or partners

Moving only selected assets into a new partnership can fail both the asset-scope and ownership-continuity requirements, even when most original partners remain.

Accountants and tax professionals

Build the complete permit-activity property numerator and denominator and calculate common ownership transferor by transferor. Preserve every asset, value, capital-account entry, liability and other consideration, seller and permit evidence, transfer document, return, tax measure, and completed outcome.

Common questions

Q: Who owned the original partnership?
A: A, B, and C, one-third each.

Q: Who owned the new partnership?
A: A and B, one-half each.

Q: Did the transfer include all relevant property?
A: No. It involved only certain capital assets.

Q: What ownership threshold did staff apply?
A: At least 80% similarity before and after the transfer.

Q: What common ownership did the stated percentages preserve?

A: At most two-thirds: A and B each carried forward their former one-third interest. The source does not show this calculation but concludes the 80-percent test failed.

Q: What assets made the transfer less than substantially all?

A: The source says only certain capital assets, including tangible personal property; it gives no schedule, values, or percentage.

Q: What consideration or tax measure applied?

A: The source does not say.

Q: Did the transfer occur or produce a final tax result?

A: The source does not say.

Citations and references

• California Revenue and Taxation Code § 6006.5(b)
• May 22 request — described without a year and not included
• United States-government 80-percent reorganization rule — referenced without citation or text
• Partner, partnership, permit, business, asset, value, scope, consideration, transfer, measure, return, audit, assessment, payment, claim, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official July 23, 1953 John H. Murray opinion:

We assume that the A, B and C partnership is engaged in an activity requiring a seller's permit.

From the statement which you have given, it would appear that the transfer was not of all or substantially all of the property held or used in the course of an activity requiring a seller's permit.

Also, it appears that after the transfer, the ownership is not substantially similar to that which existed before the transfer.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.2040
• Original supporting opinion: 395.2040 PDF

Original ruling text

395.2040

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

July 23, 1953

Mr. J--- H. S--Public Accountant
XXXX --- --- Boulevard
--- --- XX, California

Your letter of May 22

Dear Mr. S---:
You request advice as to whether the following transaction is subject to California sales tax: A, B and C are partners in Company X, each holding a 1/3 interest in that partnership. A and B form a new partnership, Company Y, with each of the partners owning a 1/2 interest in the partnership. At the time of the creation of the new partnership certain capital assets of the old partnership, including tangible personal property, are transferred to the new partnership. You ask whether the transfer of those assets would be subject to sales tax. We assume that the A, B and C partnership is engaged in an activity requiring a seller's permit. We think the transfer which you describe is subject to sales tax because the transfer does not meet any of the requirements of an exempt “occasional sale” as defined in section 6006.5(b) of the California Sales and Use Tax Law. You will note that that section defines “occasional sale” as including any transfer of all or substantially all of the property held or used in the course of an activity for which a seller's permit is required, when after the transfer the real or ultimate ownership of the property is substantially similar to that which existed before the transfer. From the statement which you have given, it would appear that the transfer was not of all or substantially all of the property held or used in the course of an activity requiring a seller's permit. Also, it appears that after the transfer, the ownership is not substantially similar to that which existed before the transfer. In determining whether ownership is “substantially similar” we have consistently applied the same 80% rule which is applied by the United States Government in determining whether certain reorganizations are tax exempt.

Mr. J---e H. S---

-2-

July 23, 1953
395.2040

We trust this sufficiently answers your question, but if you have any further questions, please feel free to call upon us. Very truly yours,

John H. Murray
Associate Tax Counsel
JHM:tj
cc:

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