Was a manufacturing-facility transfer into a newly formed 86/14 partnership taxable in Texas?

Plain-English summary

The Texas Comptroller said the described manufacturing-facility transaction was a nontaxable joint-ownership transfer under Section 151.306.

Corporation A owned the Texas facility and had paid applicable sales or use tax on property incorporated into it and later purchased for the business. It planned to sell an unrelated Corporation B a 14% undivided interest, form a partnership with B, and immediately contribute A's 86% interest and B's 14% interest to that partnership. The new 86/14 partnership would then operate the facility.

The ruling body concerns a manufacturing facility, despite STAR metadata referring to oil-drilling equipment and jointly owned leases.

What this means for you

Businesses forming a jointly owned operating partnership

The letter treated this specific sequence—a sale of an undivided interest followed immediately by both owners' contributions to a partnership—as nontaxable.

Manufacturers

The ruling recorded that applicable tax had already been paid on the facility property, but it did not separately analyze each asset.

Accountants and tax professionals

The conclusion is one sentence and rests on the facts presented. Confirm the current version and scope of Section 151.306 before applying it to a modern restructuring.

Common questions

Q: Was the described transfer taxable?
A: No. The letter called it a nontaxable joint-ownership transfer.

Q: What ownership percentages were involved?
A: Corporation A held 86% and Corporation B held 14% after the stated sale and contribution steps.

Q: Did the body concern oil-drilling equipment?
A: No. It described a Texas manufacturing facility and related tangible personal property.

Citations and references

• Section 151.306 (joint-ownership transfer, as cited in the letter)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8411L0600D05

Original ruling text

November 2, 1984

Dear **:

Thank you for your recent letter to Mrs. Hutcheson. She has asked me
to respond.

To restate the situation:

Corporation A owns a manufacturing facility in Texas. At the time the
facility was built, applicable Texas sales or use taxes were paid on all
items of tangible personal property incorporated into the facility, and
applicable taxes also have been paid on all items of tangible personal
property subsequently purchased by Corporation A for use in its business
operations conducted at such facility.

Corporation A intends to enter into a contractual arrangement with an
unrelated entity, Corporation B, pursuant to which: (i) Corporation A
will sell Corporation B, an undivided 14 percent interest in Corporation
A's manufacturing facility in Texas (and all tangible personal property
related thereto); (ii) Corporation A and Corporation B simultaneously
will form a partnership to operate the manufacturing facility jointly;
and (iii) immediately after the sale of the undivided interest referred
to above, Corporation A ,will contribute its 86 percent undivided
interest and Corporation B its 14 percent undivided interest in the
manufacturing facility (and related property) to the partnership entity.
After these transactions are completed, the partnership entity (which will
be owned 86 percent by Corporation A and 14 percent by Corporation B)
will operate the manufacturing facility.

The above transaction is nontaxable as a Joint Ownership transfer under
Section 151.306.

This opinion is based upon the facts you presented. If there are
additional or different facts this opinion may charge.

Please feel free to contact me if you have additional questions. You
may write me, or call toll free 1-800-252-5555 from anywhere in Texas
or phone 512/475-1931.

Sincerely,

Al Van Allen
Tax Policy Section
Tax Administration Division