Did forming a 50-50 partnership from each partner's capital contributions make the new partner successor to the proprietor's old tax debt?

Plain-English summary

A dental-laboratory proprietor contributed his business assets to a commencing 50-50 partnership. The other partner contributed equipment and cash. Neither the partnership nor the incoming partner bought anything directly from the proprietor, and no liabilities were assumed as consideration.

California concluded that purchase was a prerequisite to successor liability under sections 6811 and 6812. Because the parties formed the partnership through capital contributions rather than a purchase, neither the incoming partner personally nor in his capacity as partner was successor to the proprietor's pre-partnership tax debt.

The letter separated that result from tax attributable to the partnership period, when the same reporting practice continued. The amount of the proprietor's separate redetermination was not at issue because the new partner was not liable for it as successor.

What this means for you

New partners, proprietors converting to partnerships, and tax advisers

Record whether the new entity purchases the old business or simply receives capital contributions. Assumed debt, cash to the proprietor, or other consideration could change the analysis.

Common questions

Q: Did the partnership buy the proprietor's business?

A: No.

Q: Did the incoming partner assume the old tax debt as successor?

A: No.

Q: Did the result erase liabilities from partnership operations?

A: No.

Citations and references

• California Revenue and Taxation Code §§ 6811 and 6812

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 535.0056
• Original supporting opinion: 535.0056 PDF

Original ruling text

STATE OF CALIFORNIA

535.0056

STATE BOARD OF EQUALIZATION
February 23, 1972

Attention:

Dear __,
This is with reference to the petitions filed on behalf of _ and the hearing held on this matter last January 25 in Downey, California. There does not appear to be any dispute regarding the facts. From October 1, 1967 to September 19, 1968 operated a dental laboratory as a sole proprietor. He operated under account
and reported sales tax on retail sales under that account.
followed a practice of netting fabrication labor from retail sales when computing the sales tax and he only reported and billed tax on materials/ On September 20, 1968 and through September 30, 1969 the business operated as a partnership wherein and your client, were 50-50 general partners. Each partner contributed assets to the commencing partnership. The partnership did not purchase the business from
and neither did purchase anything from . The partnership entity reported tax on retail sales in the same way as was done by as an individual proprietor. However, tax was reported and paid under account . No permit was ever issued to the partnership entity. In the course of activities during the partnership operation, there arose the question of use tax liability on one airplane. Before the hearing this was resolved and deleted from any audited liability on the finding that a consumer use tax return was filed with Headquarters, Occasional Sales Unit in Sacramento. The audited tax liability was computed by using as a test period the months of June, July and August 1969. This was when the business operated as a partnership. It was found that, for reporting purposes, there was a 92.14 percent error on reporting. The error arose as a result of following the practice and not including fabrication labor charges when measuring and billing tax on retail sales. The error factor was applied to al the months that the partnership operated except June, July and August 1969, which were audited on an actual basis. The error factor was also applied to the amounts reported by ___ as an individual proprietor. The two periods have been separated for billing purposes.

535.0056

At the hearing the primary issue involved the question of whether your client, __, was liable for tax that was due the state during the time _ operated as an individual proprietor on the theory that was a successor to the business and liable under Sections 6811 and 6812 of the Revenue and Taxation Code. A reading of these two sections clearly indicates that a prerequisite to finding a successor is the fining that he purchased the business. The evidence at hand indicates that no one purchased business. Instead two men each contributed capital in the form of equipment and cash to a commencing general partnership in return for a 50-50 percent interest in the partnership business with no consideration such as assumption of liabilities. It is our conclusion that neither , personally, nor as a partner, was a successor to sole partnership business. Accordingly, we are recommending that a redetermination, under the closed out account be issued covering the period from October 1, 1967 to September 19, 1968 against personally and that no liability be asserted against as a successor. The audited measure under that account was computed using the test of activities during the partnership operations. However, the amount is not in issue since we have concluded your client is not liable for tax as a successor. Incidentally, the above measure does not include any amounts paid for the airplane. That has been already deleted from the liability. In due course, you will be receiving the Notice of Determination. In the interim, if you know the whereabouts of ___, please let us know. Very truly yours,

Robert H. Anderson
Tax Counsel