Did transferring a 49-percent joint-venture interest avoid a taxable transfer of underlying assets when the continuity agreement was signed only at the transfer?

Plain-English summary

X, a wholly owned subsidiary, held interests in numerous joint ventures. In 1983 it transferred 49 percent of those interests to a redacted entity; the source separately says a redacted corporation owned all X stock, but its uniform redactions do not prove that every omitted name was the same. The memorandum uses venture B as its only detailed example: X went from 60 percent to 11 percent, and the parties executed a March 1, 1983 amendment admitting the transferee. Paragraph 5 declared that the assignment did not sell tangible or real property because the joint venture still held its equipment, cash, materials, and other property.

Senior Tax Counsel Ronald L. Dick found no evidence of a written agreement, signed by all partners before admission, that preserved the partnership when a partner withdrew or a new partner entered. Under former Corporations Code section 15031(7) as quoted in the memorandum, the same-day amendment was not a proven pre-existing continuity agreement.

Dick's answer was conditional: if no qualifying pre-existing agreement existed, admitting the new venturer dissolved venture B. The 49-percent interest transfer therefore also produced a sale of the venture's underlying assets despite paragraph 5's contrary declaration. The memorandum reviewed a request to reconsider a Notice of Determination but gives no tax measure, recommendation to grant or deny reconsideration, final action, or later outcome.

Reconsideration posture, venture B example, former statute, and missing outcome

Board staff member Glenn A. Bystrom asked Dick to review correspondence from Mr. A concerning a redacted entity's request for reconsideration of a Notice of Determination. The request, Mr. A's correspondence, taxpayer identity, notice, assessment, audit report, legal argument, and precise question are absent. The memorandum is internal Legal Division analysis, not a supplied final reconsideration disposition.

Mr. A reportedly said X was wholly owned by a redacted corporation and participated as a partner in numerous joint-venture projects. In 1983 X transferred 49 percent of its interests in those ventures to a redacted entity. The source later says a redacted entity owned all X stock, while the live annotation supplies a parent-to-wholly-owned-subsidiary relationship. Uniform source redactions do not safely establish which omitted names match, and no organization chart or ownership record is included.

The memorandum says venture B's agreement was amended March 1, 1983 with all parties' agreement to transfer 49 percent from X to the new venturer. X retained 11 percent from its original 60 percent. Mr. A said the 49-percent limit was chosen to avoid a deemed dissolution, and journal entries were prepared at transfer. No original agreement, amendment signatures, journal entries, ledgers, consideration, liability assumption, partnership capital accounts, asset schedules, or transfer records are included.

An auditor concluded that the transfer was a sale of tangible personal property rather than merely an intangible venture-interest transfer. The memorandum cites Business Taxes Law Guide Annotation 395.0800 for the Board's position that a partner's sale of a partnership share is a sale of tangible personal property. The current live 395.0800 entry says such a sale by an individual partner may itself be an occasional sale when the partner has not otherwise made a series of taxable sales. That distinct occasional-sale issue and its facts are not analyzed in Dick's two-page memorandum.

Former Corporations Code section 15031(7), quoted in full, said withdrawal or admission caused dissolution unless an agreement in writing signed by all partners—including a withdrawing or newly admitted partner—provided otherwise before withdrawal or admission. A newly admitted partner could join that pre-existing agreement by signing on admission.

Dick had the March 1 amendment assigning 49 percent and quoting paragraph 5's declaration that the venture retained the equipment, cash, materials, and all other tangible and real property. The source preserves typographical forms including lowercase march, 49% of its shar, and Corporation Code Section; those defects do not supply missing execution timing or party signatures.

Dick says he was unable to find evidence of an agreement signed by all parties before the March 1 amendment admitted the new venturer. He did not say categorically that no agreement could exist. His conclusion therefore begins if there was no pre-existing agreement: on that condition, the transfer both dissolved the venture and resulted in a sale of underlying assets.

The live annotation compresses the facts into Company A transferring 49 percent of interests in various ventures to wholly owned subsidiary Company B and says the agreements lacked a prior continuity clause. The redacted supporting source instead clearly identifies X as a wholly owned subsidiary, says the transferee owned all X stock, and does not reveal names that would safely map its parties to the live A/B labels. The live entry also turns Dick's no-evidence and if findings into a categorical absence and outcome.

The live annotation prints Sec. Corp. Code f15031(b), including an apparent stray f; the supporting memorandum repeatedly identifies and quotes former section 15031(7). It also generalizes the B example across multiple ventures and says there was a taxable tangible-property sale. The PDF supplies no other joint-venture agreement, other amendment, property list, taxable measure, rate, assessment amount, reconsideration disposition, final decision, payment, claim, appeal, or outcome.

What this means for you

Partners and joint venturers restructuring ownership

The timing, parties, and execution of continuity provisions can control whether an interest transfer leaves the entity intact or triggers dissolution and an asset sale under the historical rule. Preserve the agreement that existed before admission or withdrawal.

Accountants and tax professionals

Review original and amended agreements, signatures, effective dates, partner admissions and withdrawals, consideration, capital accounts, journal entries, property, and liabilities. A same-day no-sale recital did not prove earlier continuity here.

Common questions

Q: Why did retaining an 11-percent interest not prevent dissolution?
A: The issue was admission of a new venturer without a qualifying pre-existing written continuity agreement, not only the percentage retained.

Q: Did the amendment say the assets stayed with the joint venture?
A: Yes, but the memorandum said that declaration did not overcome the lack of an earlier agreement satisfying the statute.

Q: What was the tax consequence?
A: Conditionally, dissolution caused a resulting sale of underlying assets if no qualifying pre-existing agreement existed. The memorandum does not give the taxable measure or final action.

Q: Is the cited partnership statute current?
A: The source applies former Corporations Code section 15031(7); current law must be checked separately.

Q: Was the transferee X's subsidiary or X's owner?

A: The live annotation uses a parent-to-subsidiary shorthand. The memorandum says X was wholly owned, X transferred the interest to a redacted entity, and a redacted entity owned all X stock; uniform redactions do not prove which omitted names match.

Q: Did Dick find that no earlier agreement existed?

A: He found no evidence of one. His conclusion remained conditional: if there was no pre-existing agreement satisfying section 15031(7).

Q: Why was the March 1 amendment insufficient?

A: It admitted the new venturer and declared no property sale, but did not itself prove an all-partner continuity agreement existed before admission.

Q: Does the governing source say section 15031(7) or 15031(b)?

A: The memorandum repeatedly says and quotes section 15031(7); the live annotation prints f15031(b). No supplied source resolves the difference.

Q: Was reconsideration granted or the tax finalized?

A: The memorandum does not say. It supplies no final action, measure, payment, claim, appeal, or later outcome.

Citations and references

• Former California Corporations Code § 15031(7) — supporting memorandum's quoted dissolution rule
• Former California Corporations Code § 15031(b) — live annotation's differing citation, printed with a stray f
• Business Taxes Law Guide Annotation 395.0800 — cited Board position on a partner's share sale; complete text not reproduced in the memorandum
• Mr. A correspondence; reconsideration request; Notice of Determination; original and amended agreements; signatures; partner admissions and withdrawals; other ventures; journal entries; consideration; liabilities; capital accounts; property; audit records; tax measure; final action; payment; claim; appeal; and outcome — described or implicated but not included

Verbatim support

From the official December 19, 1990 Ronald L. Dick memorandum:

I was unable to find any evidence that there was an agreement in writing and signed by all parties before the March 1, 1983 Amendment which admitted --- to the Joint Venture.

Therefore, notwithstanding the declaration in paragraph 5. of the Amendment that there is no sale of tangible personal property, if there was no pre-existing agreement pursuant to Corporation Code Section 15031 (7) providing for continued existence, the sale of the 49% which resulted in the admission of the new joint venturer, ---, also resulted in a dissolution of the Joint Venture and a resulting sale of the underlying assets.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.2190
• Original supporting opinion: 395.2190 PDF

Original ruling text

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum
395.2190

To:

Mr. Glenn A. Bystrom

From:

Ronald L. Dick

Subject:

-----

Date:

December 19, 1990

You asked that I review correspondence from Mr. A, regarding a request for reconsideration by ---., of a Notice of Determination issued against that entity. Mr. A provided the following background facts: “X is a wholly-owned subsidiary of ---. X is a joint venturer (partner) in numerous joint venture arrangements regarding various joint venture projects. “In 1983, X transferred 49% of its interest in such joint transfers to ---. These transfers were accomplished in accordance with the provisions of amendments to the joint venture agreements which specifically contemplated uninterrupted continuance of the joint ventures pursuant to Section 15031 of the California Corporations Code. “For example, the joint venture agreement for B was amended on March 1, 1983, to reflect the agreement of all parties to the transfer of 49% joint venture interest from X to ---. Prior to said transfer, X owned a 60% interest in the joint venture, and subsequent to the amendment and transfer, X retained an 11% interest. The transfer was specifically limited to the 49% interest to avoid a deemed dissolution of the joint venture. It should be noted that --- owned 100% of the outstanding stock of X. “At the time of the transfer, journal entries were prepared to reflect the transaction. Upon audit by the Board of Equalization, the auditor concluded the transfer constituted a sale of tangible personal property and not a transfer of an intangible interest in the joint venture.” The Board has taken the position that a sale of a partner’s share of a partnership is a sale of tangible personal property. (Bus. Tax. Law Guide Annot. 395.0800.) On the other hand, the Board has also taken the position that when a partnership agreement contains a provision of the type described in Corporations Code section 15031 (7), a transfer of a partnership interest does not occasion a change in ownership. The “person” who owns the tangible personal property, the

Mr. Glenn A. Bystrom

-2-

December 19, 1990
395.2190

partnership, remains the same. Corporations Code section 15031 (7) provides that a dissolution of a partnership is caused: “By withdrawal of a partner or admission of a new partner unless otherwise provided in an agreement in writing signed by all of the partners, including any such withdrawing partner or any such newly admitted partner, before such withdrawal or admission; provided that in the case of a newly admitted partner he or she may become a party to any such pre-existing agreement by signing the same upon such admission.” In the X case, Mr. A has sent a copy of an Amendment To Joint Venture Agreement, dated march 1, 1983, whereby X assigns and transfers 49% of its shar in the Joint Venture to ---. Paragraph 5. of the Amendment provides: “This Assignment of a partnership interest does not constitute the transfer or sale of tangible personal or real property since all equipment, cash, material or other tangible personal or real property of this Joint Venture is held by the Joint Venture Partnership and there has been no transfer or sale from that Joint Venture partnership.” I was unable to find any evidence that there was an agreement in writing and signed by all parties before the March 1, 1983 Amendment which admitted --- to the Joint Venture. Therefore, notwithstanding the declaration in paragraph 5. of the Amendment that there is no sale of tangible personal property, if there was no pre-existing agreement pursuant to Corporation Code Section 15031 (7) providing for continued existence, the sale of the 49% which resulted in the admission of the new joint venturer, ---, also resulted in a dissolution of the Joint Venture and a resulting sale of the underlying assets.

RLD:sr