Does Texas tax a corporation's contribution of operating assets and vehicles to a newly formed partnership for a partnership interest?

Plain-English summary

The Texas Comptroller addressed a corporation's transfer of its entire operating business and three vehicles to a partnership in exchange for a limited-partner interest.

The overall operating-asset transfer could qualify as an occasional sale under Rule 3.316.

For the vehicles, the letter said no motor vehicle tax was due when they were contributed upon formation of the partnership and the partnership paid no consideration other than the ownership interest. If the partnership assumed a lien or gave other consideration, motor vehicle sales or use tax was due.

The letter originally applied $10 gift tax to a no-consideration transfer into an existing partnership. STAR expressly marks that gift-tax result superseded after House Bill 2654 restricted qualifying motor vehicle gifts.

What this means for you

Businesses forming partnerships

Document formation timing, the contributed ownership interest, and the absence of other consideration. A lien assumption can turn the vehicle contribution into a taxable transaction.

Existing partnerships

Do not use the letter's old $10 gift result. Current Chapter 152 and Rule 3.80 must be applied.

Sales-tax advisers

The occasional-sale treatment of an entire operating business is separate from the motor vehicle analysis and depends on Rule 3.316's requirements.

Common questions

Q: Is a partnership interest itself disqualifying consideration?

A: The letter allowed the initial formation contribution where no other consideration was paid.

Q: What if the partnership assumes the vehicle lien?

A: The letter treated that as taxable consideration.

Q: Is the $10 existing-partnership rule current?

A: No. STAR marks the gift-tax issue superseded.

Citations and references

• 34 Tex. Admin. Code Rules 3.316, 3.80
• Texas House Bill 2654, 81st Legislature (effective September 1, 2009)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9212L1209D02

Original ruling text

STAR SUPERSEDED INFORMATION
Accession No. -
Supersede type - partial
Document superseded on - 2/22/2013
Issue(s) that caused the document to be superseded -gift tax
Reason(s): House Bill 2654, 81st Regular Legislative Session
amended Texas Tax Code Section 152 to limit the motor vehicle
gift tax to a limited group of individuals or entities.
(Effective Sept. 1, 2009). See Rule 3.80 (Motor Vehicles
Transferred as a Gift or For No Consideration).

December 8, 1992

Dear ***:

Thank you for your letter regarding the taxability of the transfer of assets of
a corporation into a partnership.

I understand a corporation intends to transfer the entire operating assets of
its business into a partnership in exchange for an interest in the partnership
as a limited partner. You indicate you feel this sale should be exempt as an
occasional sale. If the sale falls within the guidelines of the enclosed Rule
3.316, Occasional Sales, then there is no tax due on the sale.

With regard to the transfer of the motor vehicles you indicate that three motor
vehicles will be transferred into the partnership for no consideration other
than interest in the partnership. When a motor vehicle is transferred from a
partner (the corporation) to a partnership upon formation of the partnership,
the following guidelines apply: (1) If no consideration is paid by the
partnership, no tax is due; (2) If a consideration (including a lien
assumption) is paid to the partner, motor vehicle sales or use tax is due. In
the same scenario, if a motor vehicle is transferred to an existing
partnership, the following applies:

(1) If no consideration is paid by the partnership, $10 gift tax is due (on
each vehicle);

(2) If a consideration (including a lien assumption) is paid to the partner,
motor vehicle sales or use tax is due.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion could change.

If you have any questions, please don't hesitate to write the Tax
Administration Division or call one of our tax specialist toll free at
1-800-252-5555.

Sincerely,

Joan Hale