Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2017
Sales and Use Tax Annotations
395.0000 OCCASIONAL SALES—SALE OF A BUSINESS—BUSINESS REORGANIZATION—Regulation 1595
(g) "SUBSTANTIALLY ALL THE PROPERTY"—TRANSFER OF
395.1313 Partnership Assets Transferred to Partners Then to Corporation. A partnership, which is not required to hold a seller's permit, distributes all of its tangible personal property assets to two partners who each own the partnership equally. The partnership owns property divided into five categories. Categories 1 and 2 are real estate holdings. Category 3 is construction equipment and vehicles used by the partnership for business purposes, and includes an aircraft for which the partnership is indebted. Category 4 is office furniture and equipment used by the partnership for business purposes. Category 5 is property used by the individual partners for personal use or investment.
Each partner will receive an undivided one-half interest in Categories 3 and 4 of the partnership assets including the indebtedness on the aircraft. Immediately after these transfers, each partner will contribute his/her undivided one-half interest in the assets including the indebtedness on the aircraft to a corporation in which each partner owns 50 percent of the stock. Neither partner will receive additional stock or other equity in the corporation.
Assuming the partnership or the individual partners have not made any other sales of tangible personal property in a twelve month period, the transfer of the assets except for the vehicles and aircraft to the individual partners and the subsequent transfer to the corporation will be exempt from sales tax as an occasional sale under section 6006.5 (a). Since Categories 1 and 2 are real estate holdings and Category 5 property is not used in the operations of the partnership's business, the Category 3 and 4 property transferred is all of the tangible personal property used by the partnership in the course of its business operations. Therefore, it appears that all or substantially all of the tangible personal property used by the partnership in the course of its business activity is being transferred to the individual partners. Therefore, the transfer of the vehicles and aircraft as well as the transfer of the other assets in Category 3 and 4 are exempt from sales or use tax since the ownership after the transfer to the individual partner remains the same. A similar analysis applies to the transfer by the individual partner of the vehicle and aircraft and the other assets in Category 3 and 4 to the corporation since the individual partners each own 50 percent of the stock of the corporation. 8/8/88.