How did sales tax apply when a partnership liquidated assets subject to liabilities and a trust then contributed its share to a new LLC?

Plain-English summary

A seller-permitted limited partnership that leased, sold, and repaired equipment at several sites proposed complete liquidation. It would distribute fair-market-value cash, receivables, equipment, and other assets to its corporate general partner and gift-trust limited partner under preferred and nonpreferred rights in the partnership agreement. Both partners would take assets subject to partnership liabilities. The corporation would continue the business at one site. The trust would contribute its distributed assets to a new LLC operating the remaining sites, while a married couple contributed cash equal to 5 percent of the trust-contributed asset value; the trust would own 95 percent of the LLC.

Staff applied a two-level analysis: examine each transfer separately, then decide whether the series should be collapsed into a direct partnership-to-LLC sale.

For the partnership liquidation, a ratable distribution alone was not enough to avoid tax. Each partner's assumption of liabilities was consideration to the partnership, making each distribution a sale taxable to the extent of that consideration. Because the partnership held a seller's permit, the transfer did not qualify under the occasional-sale rule for a person not required to hold one. The letter assumed the corporation would receive less than 80 percent of partnership tangible property despite its 85.92-percent voting interest; a footnote said an 80-percent-or-more property transfer might instead qualify under Regulation 1595(b)(2) if every requirement was met.

The trust's next transfer qualified as an occasional sale when viewed separately. Staff understood that the distributed partnership property represented 100 percent of the trust's total real and personal property and that all of it would move to the LLC. With the couple contributing only 5 percent of the trust-contributed value, the trust retained 95 percent ownership, satisfying the regulation's property-transfer and ownership-continuity thresholds.

Staff did not collapse the steps into a direct taxable partnership-to-LLC sale. It assumed the partnership liquidation had legitimate business reasons and the trust used the LLC to obtain partnership tax treatment and liability protection. The letter warned that a series undertaken solely to avoid or alter California sales-or-use-tax liabilities would be disregarded.

A later June 21, 1996 opinion analyzed revised facts. When the partners assumed no liabilities and received approximately 33/67 assets under the agreement, staff concluded that the liquidation was not taxable. That later result does not change this letter's conclusion for the original liability-bearing proposal.

Partnership rights, individual transfers, collective test, live conflict, and missing outcome

The opinion answers the law firm's October 3, 1995 letter concerning unidentified hypothetical taxpayers. The request is not included. Staff Counsel Warren L. Astleford closes by saying section 6596 reliance relief requires a written request identifying the taxpayer and all relevant transaction facts; because the taxpayers were unidentified, the opinion did not qualify. No later identification, supplemental request, reliance, payment, penalty, or relief claim is supplied.

The corporate general partner held the preferred interest. A married couple owned 81.32 percent of that corporation as community property, and their child owned 18.68 percent. The child was sole trustee of an irrevocable generation-skipping gift trust holding the limited partner's nonpreferred interest. The source identifies beneficiary classes but no names; it supplies no corporate shares, community-property record, trust instrument, trustee power, beneficiary interest, or ownership change.

The preferred interest resembled cumulative nonparticipating preferred stock. It received a 10-percent return on its capital account before the trust received available cash, including priority for arrears. On liquidation, available cash first paid the current return, then arrears, then the corporate capital account, and only then the balance went to the trust. Initial capital accounts were $72,600 for the corporation and $11,900 for the trust; both had grown, the preferred return was in arrears, and voting rights were 85.92 percent and 14.08 percent respectively. No current balance, arrears amount, financial statement, valuation, distribution calculation, or agreement is included.

The partnership operated at several sites, primarily leased equipment, also sold and repaired equipment, and held a sales-tax permit. The live annotation mentions leasing and the permit but omits sales and repairs. The source supplies no equipment, inventory, customer, lease, sale, repair, site, permit, revenue, return, or prior transaction record.

In complete liquidation, all assets would be distributed in one transaction at fair market value according to the agreement. Both partners would receive cash, receivables, equipment, and other assets subject to liabilities. The corporation would receive its capital account, current and arrears returns, and other agreement entitlement; the trust would receive the remainder. No asset or liability schedule, fair-market valuation, appraisal, lien, debt, assumption agreement, consideration allocation, tax basis, gross receipts, or distribution document appears.

After liquidation, the corporation would continue the partnership business at one former site. The trust would contribute its share to a California LLC operating the remaining sites, with those assets still subject to liabilities. The requester said California Corporations Code section 17050 allowed the entity, Treasury Regulation section 301.7701-2 otherwise treated a trust operating a business as a corporation, and the LLC would provide limited liability and federal partnership taxation. Those are requester premises; the opinion supplies no LLC formation, operating agreement, transfer, liability protection, federal classification election, ruling, return, or confirmation.

The couple would concurrently contribute cash equal to 5 percent of the value of the assets the trust contributed. The trust then would own 95 percent and the couple 5 percent of the LLC. No actual asset value, cash amount, deposit, capital account, membership certificate, voting right, distribution right, or ownership record is supplied.

Astleford used two tiers. First, he tested each transfer between its parties. Second, he tested the series collectively to decide whether the intervening steps should be disregarded and only the before-and-after transfer analyzed. Citing Annotation 395.1840, he said steps undertaken solely to avoid or alter California sales-or-use-tax liabilities would be disregarded.

Sections 6051 and 6006(a) imposed sales tax on a retailer's gross receipts from a California retail transfer of tangible personal property for consideration; sections 6201 and 6401 addressed use tax. Sections 6367 and 6006.5 and Regulation 1595 addressed occasional sales. Regulation 1595(b)(4) made a transfer to a commencing entity nontaxable only when made solely for the first ownership interest without cash, notes, assumed debt, or other consideration. Regulation 1595(c) supplied a related vehicle, vessel, and aircraft route, but the source does not say any such property was present.

The requester relied on Annotation 395.2400's statement that a partnership's same-ratio dissolution distribution is not a sale. Astleford said this established only the ratable-distribution requirement. A partnership must also receive no consideration beyond returned interests for cancellation. He treated both partners' assumptions of partnership liabilities as consideration and their distributions as taxable sales unless separately exempt.

The incorporated authorities were Beatrice Co. v. State Board of Equalization, 6 Cal.4th 767, 783; Newco Leasing, Inc. v. State Board of Equalization, 143 Cal.App.3d 120, 126; and Cal-Metal Corp. v. State Board of Equalization, 161 Cal.App.3d 759, 766. Legal research resolved all three reporters to the source-named cases. The opinion reproduces no complete case and does not say its hypothetical matched every case fact.

The partnership maintained a seller's permit, so section 6006.5(a)'s route for persons not required to hold one appeared unavailable. Astleford assumed the corporation would receive less than 80 percent of partnership tangible property even though it had 85.92 percent of voting rights. His footnote says an 80-percent-or-more transfer to the corporation might qualify under Regulation 1595(b)(2) if its other conditions were met. The source provides no asset percentage or ownership-continuity computation.

As to the trust's separate transfer, Astleford understood its partnership distribution to represent 100 percent of all trust real and personal property and all of it to be contributed. Because the trust transferred at least 80 percent of relevant tangible property and retained 95 percent LLC ownership, the transfer was exempt under sections 6367 and 6006.5(b) and Regulation 1595(b)(2). No asset schedule proves the 100-percent premise or classifies the trust's property and selling activities.

Collectively, the steps would be collapsed into a direct taxable partnership-to-LLC property sale if they lacked a valid purpose other than California tax avoidance. Astleford instead assumed legitimate reasons for liquidation and accepted the trust's partnership-tax and liability-protection purposes. He therefore respected the separate steps. The source supplies no business-purpose resolution, advice, alternatives, timing, economic analysis, or completed series.

The live annotation preserves the partner structure, rounded 81/19 corporate ownership, seller's permit, liabilities, continuing businesses, 95/5 LLC ownership, business-purpose condition, taxable partner distributions, exempt trust transfer, and December 21, 1995 date. But it says the couple contributed cash equivalent to 50% of the assets of the LLC; the source repeatedly says cash equal to 5 percent of trust-contributed asset value. The live entry then still says the couple held only 5 percent. No record resolves the 50/5 conflict, so the source's proposed 5-percent amount controls this page and the live wording remains disclosed.

The live entry also compresses several sites into the same site, says only equipment leasing rather than leasing, sales and repairs, and describes the trust transfer as more than 80 percent of trust assets where the source assumes 100 percent of total real and personal property. It omits preferred/nonpreferred economics, capital accounts, arrears, exact voting rights, fair-market-value distributions, two-tier framework, 80-percent corporate alternative, cited authorities, hypothetical/no-section-6596 posture, missing records, and absent transaction and tax outcome.

What this means for you

Partnerships distributing assets in liquidation

A pro rata distribution can still be a sale when owners assume entity liabilities. Document the agreement entitlement, returned interest, every debt, asset and value, assumed consideration, seller's-permit status, and any separate occasional-sale test.

Businesses moving assets into an LLC

The historical occasional-sale result depended on transferring at least 80 percent of all relevant selling-activity tangible property while at least 80 percent ultimate ownership remained unchanged. Prove both numerators, denominators, and post-transfer interests.

Accountants and tax professionals

Model each transfer and the overall series. Reconcile debt assumptions, fair values, property percentages, voting and economic interests, ownership, timing, federal/entity premises, and contemporaneous nontax reasons for every step.

Common questions

Q: Why was the partnership liquidation treated as a sale?

A: The partners would take assets subject to partnership liabilities, and staff treated their assumption of those liabilities as consideration.

Q: Did a ratable distribution automatically make the liquidation nontaxable?

A: No. Staff said a ratable liquidation also had to involve no additional consideration, including assumed liabilities.

Q: Could the corporation's share qualify under the ownership-continuity rule?

A: Possibly. The letter said a transfer of 80% or more of the partnership's tangible personal property might qualify under Regulation 1595(b)(2), but it assumed that threshold was not met.

Q: Why was the trust's LLC contribution exempt?

A: Staff understood that the trust transferred all its property and retained 95% ownership of the LLC.

Q: Why did staff respect the separate steps?

A: The letter assumed valid reasons for the liquidation and that the LLC provided liability protection and partnership tax treatment.

Q: Could the hypothetical taxpayers rely on this letter for section 6596 relief?

A: No. Staff said the request did not identify the taxpayers, so the opinion did not come within section 6596.

Q: What economic rights did the two partners have?

A: The corporation's preferred interest received a 10-percent current and arrears return and capital before the trust received the balance; the source gives initial capital accounts of $72,600 and $11,900.

Q: Did the corporation's 85.92-percent vote prove it received 80 percent of property?

A: No. Astleford expressly assumed it received less than 80 percent despite that voting share; no property-distribution calculation is included.

Q: Was the trust proven to transfer all its property?

A: No. Astleford said he understood the distributed property to be 100 percent of trust real and personal property; no asset schedule is supplied.

Q: Did the married couple contribute 5 percent or 50 percent?

A: The source says cash equal to 5 percent of the trust-contributed asset value and 5-percent LLC ownership. The live annotation says 50% once but still gives 5-percent ownership; no record resolves that conflict.

Q: Why did staff respect the separate steps?

A: It assumed legitimate liquidation reasons and accepted partnership tax treatment and liability protection as nontax business purposes.

Q: Did the proposal close or produce a stated tax?

A: No source shows an executed liquidation or LLC transfer, liability amount, taxable measure, return, audit, assessment, payment, claim, appeal, or outcome.

Citations and references

• California Revenue and Taxation Code §§ 6006(a), 6006.5, 6051, 6201, 6367, 6401, and 6596
• California Sales and Use Tax Regulation 1595(b)(2), 1595(b)(4), and 1595(c)
• Beatrice Co. v. State Board of Equalization (1993) 6 Cal.4th 767, 783
• Newco Leasing, Inc. v. State Board of Equalization (1983) 143 Cal.App.3d 120, 126
• Cal-Metal Corp. v. State Board of Equalization (1984) 161 Cal.App.3d 759, 766
• California Corporations Code § 17050, as cited in the request
• Treasury Regulation § 301.7701-2, as cited in the request
• Business Taxes Law Guide Annotations 395.1840, 395.2400, and 395.1800–395.2560
• October 3, 1995 request; partnership agreement; trust instrument; capital, return, arrears and voting records; seller's permit; sites; assets, fair values and liabilities; distributions; LLC records; cash contribution; ownership; business-purpose and entity/federal-tax support; transfers; returns; audit; assessment; payment; claim; appeal; and outcome — described or implicated but not included
• June 21, 1996 follow-up — official later opinion removing liability assumptions and clarifying the distribution

Verbatim support

From the official December 21, 1995 Warren L. Astleford opinion:

Under this scenario, each partner’s assumption of the Partnership’s liabilities constitutes consideration by the partners to the Partnership such that the Partnership’s distribution of those assets is a sale which is subject to tax unless the sale qualifies as an exempt occasional sale.

The partnership may not, however, receive any consideration for the transfer of the assets if the distribution is to be regarded as a non-taxable event.

Concurrently with the Gift Trust’s transfer to the LLC, Mr. and Mrs. Taxpayer will contribute cash to the LLC in an amount equal to 5 percent of the value of the assets contributed by the Gift Trust to the LLC.

The foregoing series of transactions between the parties will be disregarded if they are undertaken solely for the purpose of avoiding or altering the California sales or use tax liabilities of the parties.

Our opinion above does not come within section 6596 since you have not identified the taxpayers subject to the foregoing transaction.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.2194
• Original supporting opinion: 395.2194 PDF
• Revised follow-up opinion: 395.2193 PDF

Original ruling text

395.2194

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 324-2637
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

December 21, 1995
Mr. R--- G--- M--M---, M--- & P--XXX West ---, Suite XXX
--- ---, California XXXXX-XXXX
Re:

KATHLEEN CONNELL
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Unidentified Taxpayer;
Occasional Sales

Dear Mr. M---:
This is in response to your letter dated October 3, 1995 regarding the application of tax to a proposed partnership dissolution and transfer of assets to a limited liability company (“LLC”) by hypothetical taxpayers. You state: “Presently there are two partners in the limitedpartnership (hereinafter ... the ‘Partnership’). One(general) partner is [a] Corporation (hereinafter ... the‘Corporation’). The other (limited) partner is the GiftTrust (hereinafter ... the
[‘]Gift Trust[‘]).
“Presently the Corporation is owned 81.32% by Mr. & Mrs. Taxpayer as community property. Their son, Child Taxpayer, individually owns the other 18.68% of the Corporation. “Child Taxpayer is the sole Trustee of the Gift Trust. The Gift Trust is an irrevocable generation skipping trust created by his parents, Mr. & Mrs. Taxpayer. The present beneficiaries of the Gift Trust are Child Taxpayer, his wife, his living issue and spouses and ex-spouses of his issue. The Trustee has the full discretion whether to pay the income and principal to the present beneficiaries of the Gift Trust. “The primary business of the Partnership is equipment leasing although the Partnership also sells and repairs equipment. The Partnership has several different sites where it operates. The Partnership currently holds a sales tax permit.

Mr. R--- G--- M---

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“The Partnership agreement sets up two classes of interests: preferred and non-preferred. The Corporation holds the preferred interest. The preferred interest is similar to cumulative nonparticipating preferred stock. The preferred interest does not participate in any increase in value of the assets or business of the Partnership. “The preferred interest is entitled to a 10% return based upon the amount of its capital account. Any cash available for distribution is first applied to the payment of the 10% return to the preferred interest holder. If there isn’t sufficient cash in one year to pay the 10% return, then any cash available in a subsequent year is applied to pay any amount in arrears before the non-preferred interest holder receives any cash distribution. “Upon liquidation the cash available for distribution must be distributed in the following order: (1) 10% return to the preferred interest holder, (2) any 10% return to the preferred interest holder in arrears, (3) repayment of the capital account of the preferred interest holder, and (4) the balance to the non-preferred interest holder. “The Gift Trust holds the non-preferred interest. Each year the nonpreferred interest holder is entitled to all cash available for distribution after the payment of the 10% return to the preferred interest holder plus any amount in arrears. “The Corporation had an initial capital account of $72,600. The Gift Trust had an initial capital account of $11,900. The capital accounts of both partners have increased. The Partnership is in arrears in paying the 10% return to the corporate general partner. “The Corporation has 85.92% of voting rights in the Partnership. The Gift Trust has 14.08% of voting rights in the Partnership. “Proposed Transactions: “The first proposed transaction would involve the complete liquidation of the Partnership. The Corporation would receive equipment and other assets in the amount specified in the Partnership agreement. The Partnership agreement provides that the Corporation would receive the amount of its capital account, plus the 10% return for the current year based on the amount of its capital account (adjusted for a short taxable year) plus any of the 10% return that was in arrears, in exchange for its interest in the Partnership. Assets will be distributed at their fair market value at the time of distribution.

Mr. R--- G--- M---

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“The Gift Trust would receive the remainder of the assets of the Partnership (and not reflected in its capital account already), in exchange for its interest in the Partnership. “All of the assets of the Partnership will be distributed to the two partners in a single transaction. The assets that the Corporation would receive in liquidation would consist of cash, receivable, equipment as well as other assets. The assets that the Gift Trust would receive in liquidation would consist of cash, receivables, equipment as well as other assets. Assets distributed to both partners in complete liquidation would be subject to liabilities. “After the liquidation, the Corporation would take over one of the sites previously owned by the Partnership and carry on the same business as the dissolved Partnership. “The second proposed transaction would involve the Gift Trust transferring its share of the assets received from the dissolved Partnership to a Limited Liability Company. “Because the Gift Trust wishes to avoid personal liability and because a trust cannot carry on a business without being taxed as a corporation under Treasury Regulation §301.7701-2, the Gift Trust will form a Limited Liability Company (LLC) under the California Corporations Code § 17050. “The LLC will shield the Gift Trust from personal liability. In addition, the LLC will be taxed as a partnership under the Internal Revenue Code and therefore the income of the LLC will not be subject to double taxation (once at the corporate level and once at the shareholder level) as the Gift Trust would be if it carried on a business itself. “Immediately after the Gift Trust receives the distribution of assets from the dissolved Partnership, the Gift Trust would contribute the Partnership assets to the newly formed LLC. The assets contributed to the LLC would be subject to liabilities. The LLC would take over the remaining sites and carry on the same business of the dissolved Partnership. “Concurrently with the Gift Trust’s contribution of the assets to the newly formed LLC, Mr. & Mrs. Taxpayer will contribute cash to the LLC in an amount equal to 5% of the value of the assets contributed by the Gift Trust to the LLC. Thereafter the Gift Trust would own 95% of the interest in the LLC and Mr. & Mrs. Taxpayer would own 5% of the LLC.” You ask our opinion as to the application of tax on a series of separate transactions involving the Partnership, Corporation, Mr. and Mrs. Taxpayer, and Child Taxpayer. Before responding to these requests, however, we note that some tangible personal property is

Mr. R--- G--- M---

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December 21, 1995
395.2194

ultimately being transferred from the Partnership to a LLC owned by the Gift Trust and Mr. and Mrs. Taxpayer by way of multiple transactions between the several parties. These types of transactions require a two-tier analysis. First, each step in the series of transactions must be analyzed for the purpose of ascertaining if there is a taxable transaction between two parties. Second, the transactions must be collectively analyzed for the purpose of determining whether, under the California Sales and Use Tax Law, the intervening steps of the transaction should be disregarded and the transactions should be analyzed only on a before and after basis, with all intervening steps of the transaction disregarded for sales and use tax purposes. (See, e.g., Business Taxes Law Guide Annot. 395.1840 (3/1/66; 7/28/86).) That is, the individual series of transactions between the parties will be disregarded if they are undertaken solely for the purpose of avoiding or altering the California sales or use tax liabilities of the parties. With that in mind, I will first discuss whether tax applies to each of the individual transactions between the parties. A. Individual Transactions “[1.] [W]ould ... the proposed complete liquidation of the Partnership ... qualify for the occasional sale exemption under Revenue and Taxation Code § 6367 and
§ 6006.5 ... [such that] no sales tax would be due as a result of the liquidation[?]” California imposes a sales tax on a retailer's gross receipts from the retail sale of tangible personal property in this state unless the sale is specifically exempt from taxation by statute. (Rev. & Tax. Code § 6051.) A sale includes any transfer of title or possession, in any manner or by any means whatsoever, of tangible personal property for a consideration. (Rev. & Tax. Code
§ 6006(a).) When sales tax does not apply, use tax is imposed on the sales price of property purchased from a retailer for the storage, use or other consumption in California. (Rev. & Tax. Code §§ 6201, 6401.) Revenue and Taxation Code section 6367 provides an exemption from sales tax for the occasional sale of tangible personal property other than vehicles, vessels, or aircraft.1 In pertinent part, Revenue and Taxation Code section 6006.5 defines an occasional sale to include certain sales by persons not required to hold a seller’s permit, and certain transfers of all or substantially all the property held or used by a person to a different entity maintaining the same real or ultimate ownership of the property.2 Even when a transfer does not qualify as an occasional sale, it may not be regarded as a taxable sale. As relevant here, Regulation 1

A sale of a vehicle, vessel, or aircraft is exempt as an occasional sale when such property 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 and the real or ultimate ownership of the property is substantially similar to that which existed before such transfer. (Reg. 1595(c).) 2 Your letter demonstrates that you understand the provisions of Regulation 1595(b)(2) regarding the transfer of substantially all the property held or used by a person in the course of activities requiring a seller’s permit where “80 percent or more” of the ownership of that tangible personal property is unchanged after the transfer. Since you assert that Annotation 395.2400 (8/26/69) makes the Partnership’s distribution a non-taxable event as a pro-rata distribution, we assume that the Corporation will not receive 80 percent or more of the Partnership’s tangible personal property upon its dissolution even though the Corporation has 85.92 percent of the voting rights in the Partnership. If this is not the case and the Corporation will receive 80 percent or more of the Partnership’s tangible personal property, the Partnership’s liquidation may qualify as a non-taxable transfer of the Partnership’s property to the Corporation provided the transfer meets the requirements of Regulation 1595(b)(2).

Mr. R--- G--- M---

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1595(b)(4) explains that tax does not apply to transfers of property to commencing corporations or partnerships solely in exchange for a first interest in the commencing entity provided the transferor does not receive consideration (e.g., cash, notes, or an assumption of indebtedness) for the transfer. Board staff has applied these principles to situations involving the contribution of property to commencing entities as well as the liquidation of assets from corporations or partnerships. (See Business Taxes Law Guide Annots. 395.1800 to 395.2560.) In this case, the Partnership is making a complete liquidation of its assets to the Corporation and Gift Trust. When an entity distributes its assets as a complete liquidation ratably to its owners (i.e., a distribution of assets to partners or shareholders in the same percentage as their ownership interests in the entity), the transfer will not be taxable unless consideration is received for the transfer. (See, e.g., Business Taxes Law Guide Annot. 395.2340 (5/7/56).) That is, the liquidation of a partnership’s assets is not taxable if the only item received by the transferor partnership is the return of the interest in the entity (i.e., the partnership interest) for the purpose of cancellation and there is no other consideration such as an assumption of liabilities. You state that the assets of the Partnership will be distributed to the Corporation and Gift Trust in the same ratio as each partner’s interest in the Partnership. You also state that assets distributed to both partners in complete liquidation of the Partnership would be subject to liabilities. We understand this to mean that each partner will assume certain of the Partnership’s liabilities previously associated with the assets to be distributed to the partners. Under this scenario, each partner’s assumption of the Partnership’s liabilities constitutes consideration by the partners to the Partnership such that the Partnership’s distribution of those assets is a sale which is subject to tax unless the sale qualifies as an exempt occasional sale. Since the Partnership maintains a seller’s permit, it appears that the transfer of these assets will not qualify as an exempt occasional sale under subdivision (a) of section 6006.5. You assert that Business Taxes Law Guide Annotation 395.2400 (8/26/69)3makes the Partnership’s distribution a non-taxable transaction since the assets are distributed in the same ratio as the partnership interests. Annotation 395.2400 correctly summarizes the first requirement that must be met in order for a partnership’s distribution of assets to its partners to be regarded as a non-taxable transaction (i.e., ratable distribution of assets to the partners). The partnership may not, however, receive any consideration for the transfer of the assets if the distribution is to be regarded as a non-taxable event. This second requirement is based on case law finding that the assumption of a liability is consideration (see, e.g., Beatrice Co. v. State Bd. of Equalization (1993) 6 Cal.4th 767, 783; Newco Leasing, Inc. v. State Bd. of Equalization (1983) 143 Cal.App.3d. 120, 126; Cal-Metal Corp. v. State Bd. of Equalization (1984) 161 Cal.App.3d 759, 766) and therefore subjects a retail transfer of assets with an assumption of liabilities to tax. Thus, the liquidation of a partnership’s assets is not subject to tax only if the 3

Business Taxes Law Guide Annotation 395.2400 (8/26/69) provides:

“If, upon dissolution of a partnership, the assets are distributed in the same ratio as the partnership interests, the distribution does not constitute a taxable sale.”

Mr. R--- G--- M---

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item(s) received by the transferor partnership is the return of the interest in that entity for the purpose of cancellation and it receives no other consideration such as the assumption of its liabilities. This is consistent with Regulation 1595(b)(4) which makes a contribution to a commencing corporation or partnership not taxable only if property is transferred in exchange for a first interest in the commencing entity and the transferor does not receive consideration (including an assumption of indebtedness) for the transfer. “[2.] [Would] the proposed transfer by the Gift Trust to the newly formed LLC ... qualify for the occasional sale exemption under Revenue and Taxation Code § 6367 and § 6006.5 ... [such that] no sales tax would be due as a result of the transfer of assets to the LLC[?]” As set forth above, Revenue and Taxation Code section 6367 exempts the occasional sale of tangible personal property other than vehicles, vessels, or aircraft. Revenue and Taxation Code section 6006.5(b) defines an occasional sale as any transfer of all or substantially all the property held or used by a person in the course of those activities where after the transfer the real or ultimate ownership of the property is substantially similar to that which existed before the transfer. Regulation 1595(b)(2) further interprets Revenue and Taxation Code section 6006.5(b) as follows: “Tax does not apply to a transfer of all or substantially all the property held or used by a person in the course of activities forwhich the person is required to hold a seller's permit or permits or would be required to hold a seller's permit or permits if the activities were conducted in this state, provided that after the transfer the real or ultimate ownership of the property is substantially similar to that which existed before such transfer. `Substantially all the property' means 80 percent or more of all the tangible personal property held or used in the course of activities, including tangible personal property located outside of this state. If a person engages in two or more separate selling activities, for each of which the person is required to hold a seller's permit or would be required to hold a seller's permit if the activity were conducted in this state, a transfer of 80 percent or more of the tangible personal property held or used in the combined activities must be made in order to qualify for the exemption described in this paragraph. Stockholders, bondholders, partners, or other persons holding an ownership interest rather than a security interest in the corporation or other entity are regarded as having the real or ultimate ownership of the property of the corporation or other entity. “The real or ultimate ownership is "substantially similar" to that which existed before a transfer if 80 percent or more of that ownership of the tangible personal property is unchanged after the transfer....” You state that the Gift Trust will receive a ratable distribution of the Partnership’s property upon liquidation. We understand that this property constitutes 100 percent of the Gift Trust’s total property (real and personal) and that this entire amount will be transferred to the

Mr. R--- G--- M---

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LLC. Concurrently with the Gift Trust’s transfer to the LLC, Mr. and Mrs. Taxpayer will contribute cash to the LLC in an amount equal to 5 percent of the value of the assets contributed by the Gift Trust to the LLC. In examining this step of the transaction only, the Gift Trust’s transfer to the LLC is exempt from tax as an occasional sale since it is transferring at least 80 percent of the tangible personal property it held or used as a Gift Trust to the LLC and the Gift Trust will maintain at least 80 percent ownership of the LLC at the conclusion of the transfer. B. Collective Transaction The foregoing series of transactions between the parties will be disregarded if they are undertaken solely for the purpose of avoiding or altering the California sales or use tax liabilities of the parties. That is, where there is no valid business purpose for structuring a series of transactions to achieve the ultimate transfer of the Gift Trust’s portion of property from the Partnership to the LLC other than for the avoidance of California sales or use tax, the series of transactions will be disregarded and the transaction will be viewed as a taxable sale of tangible personal property from the Partnership to the LLC. We assume from your letter that the Partnership is liquidating its assets based on valid and legitimate business reasons. We also understand that the Gift Trust will transfer its assets to the LLC in order to be taxed as a partnership and not as a corporation. Under these facts and assumptions, we would not disregard the series of transactions between the Partnership, Gift Trust, and LLC for sales and use tax purposes and not view the series of transactions taken as a whole as a taxable sale of tangible personal property from the Partnership to the LLC. Please note that Revenue and Taxation Code section 6596 sets forth the circumstances under which a taxpayer may be relieved of liability for taxes when relying on a written response to a written request for opinion. To come within that section, the request for opinion must identify the taxpayer as well as all relevant facts relating to the particular transaction. Our opinion above does not come within section 6596 since you have not identified the taxpayers subject to the foregoing transaction. If you have any further questions, please write again. Sincerely,

Warren L. Astleford
Staff Counsel
WLA:rz
cc: --- --- District Administrator - --