When a commonly-owned partnership contributes equipment and real estate to a joint venture with a commonly-owned corporation, and profits/losses are split, does that create a taxable equipment rental, and is the profit/loss share taxable consideration for using the equipment?

Subject

Joint Venture Between Commonly Owned Corporation And Partnership — Profit And Loss Split Is Not Consideration For Use Of Fixed Assets

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9312L1282B02

Plain-English Summary

A taxpayer's representative wrote to the Comptroller about a proposed joint venture structure. A client group included a corporation that operated a construction company but owned no fixed assets, a family limited partnership that owned fixed assets, and four related individuals who together owned 100% of both the corporation and the partnership. The commonly owned corporation and partnership planned to form a joint venture: the corporation would contribute management and labor, and the partnership would contribute capital in the form of real estate and equipment. Under the arrangement, the profits or losses of the joint venture would be split between the corporation and the partnership.

Two questions were asked. First, would this arrangement create a taxable rental of equipment — either between the commonly owned corporation and the joint venture, or between the partnership and the joint venture? The Comptroller answered no, a taxable rental does not occur, but added an important condition: Texas sales or use tax must already have been paid on the equipment when the partnership initially acquired it. The letter points to Section (b)(1) of the enclosed Rule 3.331 as the basis for that answer.

Second, would the profit or loss the partnership receives from the joint venture be treated as consideration for the use of its fixed assets (i.e., as if it were rent)? The Comptroller answered no — profits and losses are not consideration.

What This Means For You

If you're structuring a joint venture between commonly owned entities where one side contributes capital assets (equipment, real estate) and the other contributes labor/management: This letter indicates that splitting profits and losses between the venturers, rather than paying one venturer a fixed rental fee, is not itself a taxable event and is not treated as rental consideration for the use of the contributed equipment.

The "no taxable rental" answer comes with a condition, not a blanket exemption: The Comptroller's response to Question 1 explicitly required that use tax must have already been paid on the equipment when the partnership initially acquired it. If that tax was never paid up front, this letter does not say the joint venture structure lets you avoid it — the condition suggests the analysis could differ.

This letter is fact-specific and narrow: It addresses only whether (a) contributing equipment to a joint venture in exchange for a profit/loss share creates a taxable rental, and (b) whether that profit/loss share counts as rental consideration. It does not address other tax consequences of forming the joint venture, and the Comptroller notes its opinion is "based on the facts presented" — different facts could lead to different answers.

Q&A

Q: Does a joint venture between a commonly owned corporation and partnership, where the partnership contributes equipment, create a taxable equipment rental?
A: No. The Comptroller ruled that no taxable rental occurs between the commonly owned joint venturers or between the partnership and the joint venture — but only on the condition that Texas sales or use tax was already paid on the equipment when the partnership initially acquired it, per Section (b)(1) of Rule 3.331.

Q: Is the partnership's share of the joint venture's profits or losses treated as taxable consideration for letting the venture use its equipment and real estate?
A: No. The letter states plainly that "the profits and losses are not consideration" for the use of the fixed assets.

Q: What happens if use tax was never paid on the equipment before it was contributed to the joint venture?
A: The letter doesn't say directly, but its answer to Question 1 is conditioned on tax having "been paid on the equipment initially by the partnership" — implying the "no taxable rental" conclusion depends on that condition being met.

Q: Can other taxpayers rely on this letter for their own joint venture?
A: Only the taxpayer who requested it can rely on it for detrimental-reliance purposes (see the disclaimer below), and the letter itself cautions that "different facts, though similar, might lead to different answers."

Original ruling text

December 30, 1993

Dear **:

This is in response to your fax transmittal dated December 22, 1993,
regarding sales tax as it applies to the facts set out below.

FACTS: ** have a client group, two members of which propose
entering into a joint venture agreement. The group is comprised of the
following:

-- a corporation, which operates a construction company, but which owns
no fixed assets;

-- a family limited partnership which owns fixed assets;

-- and four (4) related individuals, who own 100% of both the corporation
and the partnership.

The commonly owned corporation and partnership propose to enter into a
joint venture under which the corporation would provide management and
labor, and the partnership would provide capital in the form of real
estate and equipment. The profits or losses of the venture would be split
between the corporation and the partnership.

QUESTIONS:

1. Will a taxable rental of equipment occur between the commonly owned
   joint ventures, or between the partnership and the joint venture?

RESPONSE: No, a taxable rental does not occur, however, Texas sales or
use tax must have been paid on the equipment initially by the partnership.

See Section(b)(1) of the enclosed Rule 3.331.

2. Will the profit or loss received by the partnership be deemed
   consideration for the use of the fixed assets?

RESPONSE: No, the profits and losses are not consideration.

This opinion is based on the facts presented. Different facts, though
similar, might lead to different answers. If you have any questions or
need more information, please write or call me toll free at
1-800-531-5441, extension 50330, or 512-475-0330.

Sincerely,

Bettie Peterson
Tax Administration Division

NOTE: Previous Accession Number 9402023L.3 and/or 9402023L