Could a Texas corporation transfer vehicles tax-free to a newly formed LLC for only a membership interest?

Plain-English summary

The Texas Comptroller said a corporation could transfer vehicles to a newly formed Texas LLC without motor vehicle sales tax or gift tax when the transaction merely adopted a new form of doing business.

The result required no ownership change, continuation of the same business, and no consideration other than the corporation's membership interest in the LLC. Texas recognition of an LLC as a legal entity like a corporation or partnership supported Rule 3.64(b)'s treatment.

The result changed if the LLC gave other consideration. Debt forgiveness or assumption of debt in exchange for a vehicle was consideration and made the transaction taxable.

What this means for you

Corporations and LLCs

Entity continuity and the exact consideration controlled the historical exemption.

Restructuring advisers and fleet managers

Document ownership, business continuity, membership issuance, and every liability assumed.

Common questions

Q: Was the membership interest taxable consideration?

A: No, on these facts.

Q: What made the transfer taxable?

A: Other consideration, including debt forgiveness or debt assumption.

Citations and references

• 34 Tex. Admin. Code Rule 3.64(b)
• Tex. Tax Code §§ 152.021 and 152.025

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9707597L

Original ruling text

July 10, 1997

Dear ***:

Thank you for your correspondence of June 26, 1997 concerning the tax
consequences of transferring motor vehicles from a Texas corporation to a newly
formed Texas Limited Liability Company (LLC) for no consideration other than a
membership interest in the LLC.

The intent of Rule 3.64(b) is that there be no taxable sale when vehicles are
transferred in connection with the adoption of a new form of doing business
without a change in ownership and with no consideration other than an interest
in the newly formed entity. Therefore, since Texas law recognizes an LLC as a
legal entity the same as a corporation or partnership, the transfer of motor
vehicles from a Texas corporation to a newly formed Texas LLC for no other
consideration than the corporation receiving a membership interest in the LLC
is not subject to either the motor vehicle sales tax Section 152.021 or the
motor vehicle gift tax sec. 152.025, provided the newly formed LLC is to
continue in the same business as the corporation after the transfer.

The membership interest in the LLC is not taxable only if there is no
consideration given by the entity receiving the membership interest, such as a
forgiveness of debt or the assumption of debt in exchange for the motor
vehicle, which is clearly the exchange of a motor vehicle for consideration and
a taxable transaction.

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

If you have any questions or need additional information, do not hesitate to
call toll free 1-800-531-5441, extension 3-4986, or write to Comptroller of
Public Accounts, Tax Policy Division, Austin, TX 78774.

Sincerely,

Ken Koch
Tax Policy Division

an equal opportunity employer