Is transferring tangible personal property from a corporation to a newly-formed partnership, in exchange only for a limited partner interest, a taxable sale for Texas sales tax purposes?

Subject

Contribution To Capital — Transfer Of Tangible Personal Property Owned By Corporation To Newly Formed Partnership In Return For Limited Partner Interest — Not A Taxable 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/9312L1285A06

Plain-English Summary

A corporation ("Company A") planned to transfer part of its tangible personal property to a newly-formed limited partnership ("Partnership B") when the partnership was created. In exchange, Company A would receive only a limited partner interest in Partnership B — no cash, no other consideration, and Partnership B would not assume any of Company A's liabilities. Notably, Company A had already agreed to sell that same tangible personal property to a third party (an entity exempt from sales tax) at a future date, and Partnership B would take the property subject to that pre-existing obligation to eventually sell it.

The Comptroller had previously ruled on a similar situation: when tangible personal property is transferred to a newly-formed, noncapitalized corporation solely in exchange for 100% of that corporation's stock, the transaction is not a taxable sale — the agency concluded the legislature did not intend to tax this kind of transaction. (By contrast, once a corporation is already capitalized, the Comptroller treats trading stock for assets as a taxable transaction.)

Applying that same reasoning here, the Comptroller stated it would take the same position for tangible personal property transferred to a newly-formed partnership in exchange for a partnership interest: it is not a taxable sale. The letter also separately addressed the third-party sale obligation — Partnership B's assumption of Company A's obligation to eventually sell the property to the third party does not count as consideration for Texas sales tax purposes, so it does not change the "not a taxable sale" conclusion.

The letter closes with the Comptroller's standard caveat: this opinion is based on the specific facts presented, and different facts — even if similar — could lead to a different answer.

What This Means For You

If you're contributing property to a newly-formed partnership solely for a partnership interest: This letter indicates the Comptroller treats that kind of capital contribution the same way it treats a capital contribution to a newly-formed, noncapitalized corporation in exchange for 100% of its stock — not a taxable sale. The key facts here were that the partnership was newly formed, the only thing received back was the partnership interest, and no liabilities were assumed.

If your transaction differs in timing or structure: The letter draws a sharp line based on whether the recipient entity is newly formed or already capitalized. It says the Comptroller has treated trading stock for assets as taxable after a corporation has already been capitalized — implying that the same later-in-time transfer to an already-existing partnership could be treated differently than a contribution made "upon formation." Get a fresh, letter-specific ruling if your facts diverge (for example, if the partnership already exists and is not being newly formed).

If there's a pre-existing obligation attached to the property (like a future sale commitment): This letter found that the transferee's assumption of the transferor's obligation to sell the property to a third party in the future is not treated as consideration for sales tax purposes. That means such an assumed obligation, by itself, does not convert an otherwise non-taxable capital contribution into a taxable sale.

Note on scope: This letter cites no statute or administrative rule — it relies entirely on the agency's own prior position regarding property-for-stock exchanges with newly-formed corporations, extended by analogy to newly-formed partnerships. The Comptroller also expressly limits the ruling to the facts presented, so it should not be read as a blanket rule for all capital contributions to partnerships.

Q&A

Q: Is transferring property to a brand-new limited partnership in exchange for a limited partner interest a taxable sale in Texas?
A: According to this letter, no. The Comptroller treated it as a non-taxable transaction, applying the same reasoning it uses for property contributed to a newly-formed, noncapitalized corporation in exchange for 100% of its stock.

Q: Does it matter that the partnership took the property subject to an existing obligation to sell it to a third party later?
A: No — the letter specifically states that the partnership's assumption of the corporation's obligation to sell the property to a third party in the future is not consideration for Texas sales tax purposes, so it doesn't affect the non-taxable treatment.

Q: Would the answer be different if the corporation was already capitalized when the stock-for-assets trade happened?
A: Yes, based on the letter's own description of prior agency policy: once a corporation has been capitalized, the Comptroller has considered trading stock for assets a taxable transaction. The non-taxable treatment described here applies to the newly-formed scenario.

Q: Did the ruling cite any statute or rule to support its conclusion?
A: No. The letter relies solely on the Comptroller's own prior administrative position regarding transfers to newly-formed corporations for stock, extended by analogy to a newly-formed partnership; no statute or rule is quoted in the text.

Original ruling text

December 20, 1993

Dear **:

I received your letter requesting written confirmation of our recent telephone
conversations concerning the following transaction.

A corporation ("Company A") will transfer to a newly-formed limited partnership
("Partnership B"), upon formation, a portion of the tangible personal property
owned by Company A solely in return for a limited partner interest in
Partnership B. Company A will receive no consideration for the transfer of the
tangible personal property, other than the receipt of the interest in
Partnership B, and Partnership B will not assume any liabilities of Company A.
Company A previously agreed to sell the tangible personal property to a third
party, which is an entity exempt from sales tax, at a future date and
Partnership B will receive the tangible personal property subject to the
obligation to sell the tangible personal property in the future.

This agency has previously addressed the situation where tangible personal
property is transferred to a noncapitalized corporation in exchange for 100% of
the corporate stock. After substantial consideration, we concluded that the
legislature did not intend to tax this type of transaction as a taxable sale.
After a corporation has been capitalized, this office has considered the
trading of stock for assets a taxable transaction. We would take the same
position concerning tangible personal property transferred to a newly-formed
partnership.

Partnership B's assumption of Company A's obligation to sell the tangible
personal property to a third party at some future date is not consideration for
Texas sales tax purposes.

This opinion is based on the facts presented. Different facts, though similar,
might lead to different answers. Please let me know if you need any further
information.

Sincerely,

Mona Shoemate
Tax Administration

NOTE: Previous Accession Number 9312036L