Could corporations transfer business assets into a new partnership, or sell an undivided interest for cash, without Texas sales tax?

Plain-English summary

Corporations X and Y planned to form Partnership P and move tangible personal property into it. Texas said a contribution for no consideration was not a sale. Consideration could include cash or the assumption or forgiveness of debt. Even when consideration was given, a contribution could qualify as an exempt joint-ownership transfer if tax had already been paid on the property and the transfer arose from a good-faith, bona fide contractual relationship rather than a plan merely to avoid limited sales tax.

Texas applied the same joint-ownership conditions to X's proposed cash sale to Y of an undivided interest in each asset. The letter also rejected an attempt to combine separate transfers for the occasional-sale exemption: the transferor and the 80% substantially-similar-ownership test had to be evaluated transaction by transaction.

What this means for you

The form and consideration for each asset transfer mattered. A contribution with no consideration was not a sale, while an exempt joint-ownership transfer required prior tax payment and a real contractual business purpose. Separate transactions could not be pooled to satisfy the occasional-sale ownership test.

Common questions

Was a contribution to the partnership a sale? Not if the contributing corporation received no consideration from the partnership.

What counted as consideration? The letter listed cash and the assumption or forgiveness of debt as examples.

Could a transfer with consideration still be exempt? Yes, as a joint-ownership transfer if tax had already been paid and the transfer was made under a good-faith, bona fide contractual relationship rather than solely for tax avoidance.

Could X and Y combine their ownership percentages for the 80% occasional-sale test? No. Texas said each transfer was a separate transaction and had to meet the test individually.

What did "property" mean in the cited occasional-sale provision? The Comptroller interpreted it to include only tangible personal property.

Citations and references

• Tex. Tax Code § 151.304(b)(3) — the occasional-sale provision quoted and interpreted in the letter.
• Comptroller Hearing No. 8089 — cited by the letter for its interpretation of "property."

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9103L1089E08

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

JOHN SHARP
Comptroller March 13, 1991

Dear **:

Thank you for your recent letter, which Debbie Angus has
assigned to me for reply, and for your recent phone call.

According to your facts, Corporation X and Corporation Y
intend to form Partnership P, which will continue the
business now conducted by X alone.

Your first question involves the tax consequences of
transfers to P of certain tangible personal property now
used by X to conduct its business. You state that X will
first sell a portion of the tangible personal property to Y,
in exchange for cash. Next, X and Y will contribute the
tangible personal property to partnership P.

Several thoughts occur. First, if X receives no
consideration from P in exchange for the tangible personal
property it contributes, then no sale has occurred.
Likewise, if Y receives no consideration from P in exchange
for the tangible personal property it contributes, then no
sale has occurred. Consideration may take different forms,
including cash, or assumption or forgiveness of debt. A
contribution for no consideration is not subject to tax.

If consideration is given, then the contributions to P by X
and Y of tangible personal property are still exempt as
joint ownership transfers, provided tax has already been
paid on the tangible personal property, and that the
transfers are made pursuant to good faith, bona fide
contractual relationships between the transferors and
transferee (and not simply to avoid limited sales tax).
The partners, after the transfers, own joint or undivided
interests in the property they contributed.

This renders moot your questions about the occasional sale
exemption as it would apply to these transactions. But for
the record, I disagree with and would like to discuss your
proposed interpretations of the statute and rule.

First, you point to the following clause in Tax Code
151.304 (b):

In this section, "occasional sale" means:

(3) a transfer of all or substantially all the
property used by a person in the course of an
activity if after the transfer the real or
ultimate ownership of the property is
substantially similar to that which existed before
the transfer; . . .

You propose that "a person" in this context may be any
person, not just the transferor. You suggest that this
exemption applies to the situation you describe, because X
made use of the assets it will sell to Y, who then will
transfer the assets to P.

This is not a valid construction of the statute, because
sales tax is a tax on transactions. A statutory exemption
may or may not attach to a particular transaction. A
previous transaction generally has no bearing on tax
exemptions available in a subsequent transaction involving
the same taxable item. To agree that "a person" in this
context can be any person other than the transferor in a
specific transaction would permit combining a series of
transactions in order to rope in an exemption that does not
apply to any one transaction by itself. The statutes do not
allow this.

The same applies to the argument that X's and Y's percentage
ownership to the assets should be combined to equal or
exceed the 80% floor for "substantially similar" ownership
of the tangible personal property to be transferred to P.
The transfer of property from X to P is one transaction; the
transfer of property from Y to P is a separate transaction.
The 80% ownership test must be applied to each transaction
individually to determine whether the exemption applies.

Next, you asked for our definition of the word "property" in
Tax Code Section 151.304 (b)(3). We interpret this term to include
only tangible personal property. (See enclosed Hearing No.
8089).

Finally, you ask whether the joint ownership transfer
exemption would apply to a sale of tangible personal
property by X to Y of an undivided interest in each of X's
assets in exchange for cash. After the transfer, X and Y
would each own an undivided interest in the property
formerly owned by X alone.

This constitutes a joint ownership transfer, provided the
interest is sold pursuant to a good faith, bona fide
contractual relationship and the tax has previously been
paid on the tangible personal property. If the transfer is
made solely for the avoidance of limited sales tax
liability, it does not constitute an exempt joint ownership
transfer. This is obviously a question of fact. On the
telephone, you indicated that this transfer would be so
structured for bona fide contractual considerations, and not
purely for the avoidance of limited sales tax.

Per your request in our conversation, I have also enclosed a
copy of a recent letter from this agency that touches on
this same subject.

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
1-800-531-5441, ext. 3-3889.

Sincerely,
John Christian
Tax Administration