Can an entire operating segment qualify as an occasional sale, and is a no-consideration asset distribution on joint-venture dissolution taxable?

Plain-English summary

Company C planned to sell all operating assets of a separate identifiable business segment to a new joint venture formed by Companies A and B. The Comptroller said that sale would not be taxable if every criterion in Rule 3.316(d) for an occasional sale was met. What the purchaser did with the assets after the sale did not affect the original sale's taxability.

The letter separately addressed a possible later dissolution. A legitimate joint venture could distribute its assets to its partners in proportion to their interests without tax when the distribution was made for no consideration. Without consideration, the distribution did not meet Tax Code Section 151.005's definition of a sale.

What this means for you

The occasional-sale conclusion was conditional, not automatic: the original transfer had to satisfy all Rule 3.316(d) requirements. A later tax-free dissolution distribution depended on both a legitimate joint venture and the absence of consideration.

Common questions

Was the sale of the operating segment automatically exempt? No. It qualified only if all Rule 3.316(d) criteria were met.

Did the buyer's later use or distribution of the assets change the original sale? No. The Comptroller said the purchaser's later actions did not affect that sale's taxability.

Was the dissolution distribution taxable? No, on the stated facts: a legitimate joint venture distributed assets to partners for no consideration in proportion to their interests.

Why was the distribution not a sale? It lacked consideration and therefore did not meet Section 151.005's definition.

Citations and references

• 34 Tex. Admin. Code Rule 3.316(d) — occasional-sale criteria
• Tex. Tax Code Section 151.005 — definition of 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/9109L1133B10

Original ruling text

September 18, 1991

Dear **:

Please accept my apology for the delay in responding to your
August 16, 1991 letter concerning exemptions from sales tax that
might apply to the transactions that you described as follows.

1. Company A, a Texas corporation that has been in business for
   many years, will form a joint venture with a newly-formed Texas
   corporation, Company B.

2. Company C will sell the entire operating assets of a separate
   identifiable segment of its business operations to the newly
   formed joint venture.

3. The joint venture will conduct the business previously engaged
   in by the identifiable segment of Company C, whose assets it now
   owns.

4. After December 31, 1991, Company A and Company B may dissolve
   the joint venture. The assets will be distributed to Company A
   and Company B in proportion to their respective joint venture
   interests.

RESPONSE: The sale of the entire operating assets by Company C
will not be taxable if all of the criteria listed in section (d)
of Rule 3.316 on occasional sales are met. The actions of the
purchaser of the assets after the sale do not affect the
taxability of the original sale of the assets.

The distribution of a legitimate joint venture's assets to its
partners for no consideration upon dissolution of the joint
venture is not taxable. It does not meet the definition of sale
given in SECTION 151.005.

This opinion is based on the facts that 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- 252-5555, ext.
34685, from anywhere in the United States or phone 512/463-4685.

Sincerely,

Julie Pesl
Tax Administration Division