Was a corporation's transfer of equipment to a new limited partnership for a 99% interest exempt as a joint-ownership transfer?

Plain-English summary

The Comptroller gave a conditional answer rather than deciding that the transfer automatically qualified.

A corporation proposed transferring some business equipment, real property, intangible property, and resale inventory to a new Texas limited partnership in exchange for a 99% limited-partnership interest, with the partnership also assuming liabilities. An individual would contribute assets for the remaining 1% general-partnership interest.

The noninventory equipment transfer was exempt under Rule 3.331 only if the corporation retained a joint or undivided interest in that tangible personal property after the transfer and had paid tax when it originally acquired the property. The author had not extensively researched whether Texas limited-partnership law permitted that ownership. If the corporation did not or legally could not retain the joint or undivided interest, the exemption did not apply.

The resale inventory was exempt as a sale for resale if the corporation obtained a properly completed and signed resale certificate from the partnership.

What this means for you

Receiving a large partnership interest was not enough by itself. The joint-ownership exemption turned on the corporation's property interest after the transfer, an issue the letter expressly left to the governing partnership law and transaction documents.

Common questions

Did the Comptroller definitively approve the equipment exemption? No. The answer was conditional.

What had to remain after the transfer? A joint or undivided interest held by the corporation in the equipment.

What if Texas law prevented that ownership? The transfer would not qualify for the joint-ownership exemption.

How was resale inventory treated? It was exempt as a sale for resale with a properly completed and signed resale certificate.

Citations and references

• 34 Tex. Admin. Code Rule 3.331

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9204122L

Original ruling text

April 15, 1992

Dear **:

Thank you for your recent telephone calls, FAX, and letters. As I understand
it, you would like an opinion regarding the taxability of the following
transaction:

XYZ Corporation is considering transferring some, but not all, of the tangible
personal property it uses in its business (together with real property and
intangible property) to a newly-created Texas limited partnership (LP) in
exchange for a 99% limited partnership interest. Also, LP will assume some of
XYZ's liabilities in consideration for the transfer. XYZ is presumed to have
paid tax on tangible personal property it intends to transfer to LP.

XYZ will also transfer certain items of resale inventory to LP, and intends to
obtain LP's resale certificate instead of collecting tax on this transaction.

An individual will contribute certain assets of his own to LP in exchange for a
1% general partnership interest.

Question: Is the transfer of tangible personal property (excluding inventory
items bought by LP for resale) from XYZ to LP exempt from tax as a joint
ownership transfer under Rule 3.331?

Answer: As we have discussed on the telephone, I have not extensively
researched the law governing the nature of a limited partner's interest in LP
property. I had understood that a limited partner is a capital investor, only,
with restricted responsibility for LP business and limited liability for LP
indebtedness. I do not know how, or even if, Texas law restricts a limited
partner's right to hold a joint or undivided interest in LP property.

Not knowing what kind of restrictions are thus imposed by law, I can answer
only that this transaction is exempt from tax if XYZ will own a joint or
undivided interest in the tangible personal property after the transfer
(presuming XYZ paid tax on the property upon original acquisition). If XYZ does
not, or cannot by law, hold-a joint or undivided interest in LP property, then
the transaction does not qualify as an exempt joint ownership transfer.

The portion of the transaction that relates to resale inventory is, of course,
exempt as a sale for resale. XYZ must obtain a properly completed and signed
resale certificate from LP to document the exemption.

This opinion is based on the facts presented. Different facts, though similar,
might lead to different answers. If you have further questions, feel free to
write or call me at 1-800-252-5555, ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration Division