How did Texas treat partner-interest transfers, dissolution distributions, and a later computer-equipment sale involving assumed debt?

Plain-English summary

Two partners sold their interests in computer equipment to the other seven partners. That interest transfer was not taxable, and the later distribution of the equipment to the remaining partners when the partnership dissolved was also exempt.

The individuals then transferred the computer and related equipment to a company that assumed debt as consideration. That transfer was a “sale” under Texas Tax Code Section 151.005, but it could qualify for the occasional-sale exemption because the partnership had legally terminated and the individuals owned the assets before the sale.

The letter also warned that the buyer might have successor liability if it acquired the business. STAR now states that the former Rule 3.326 cited for that issue has been replaced by Texas Tax Code Section 111.020.

Common questions

Were the partner-interest transfers taxable? No.

Was the dissolution distribution taxable? No.

Was the later transfer to the company a sale? Yes, because assumed debt was consideration, but the letter said it could qualify as an occasional sale.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8812L0921F01

Original ruling text

ALERT: References to Rule 3.326 have been replaced by Section 111.020, Tax Collection On Termination of Business.

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller December 28, 1988

Dear **:

Thank you for your letter of December 22, 1988 concerning the
taxability of several transactions between Partnership A and
Company B.

According to your letter, Partnership A paid sales tax on the
original purchase of a computer and several pieces of related
equipment which the partnership leased to Company B and then used
to provide data processing services for Company B. Sales tax was
collected from Company B on these transactions.

The sale by two partners of the two partners' interests in the
computer equipment to the remaining seven partners is not subject
to sales tax. The subsequent redistribution of the computer
equipment to the remaining partners upon dissolution of the
original partnership is also exempt.

The transfer of the computer and related equipment to Company B
meets the definition of sale given in Section 151.005. The
assumption of debt by Company B is the consideration given for the
equipment. According to ******'s letter of December 28,
1988, the partnership will be legally terminated and the assets
transferred to the individuals prior to this sale. The sale of
the computer equipment by the individuals can qualify for
exemption as an occasional sale under Rule 3.316 (b)(1).

In one of our telephone conversations, you indicated that the
computer and related equipment were not the entire operating
assets of the partnership or an identifiable segment of the
business. However, I am sending you Rule 3.326 Liability Incurred
by Purchase of a Business. If it is determined that Company B is
the successor to the business, it could be held responsible for
any tax, penalty or interest owed to the state. Rule 3.326
explains the procedure by which Company B may be relieved of that
liability.

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

Please feel free to contact me if you have any additional
questions. You may write me, call toll-free 1-800-531-5441 from
anywhere in the United States or phone 512/463-4685.

Sincerely,
Julie Pesl
Tax Correspondence