Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 395.2291


395.2291 Liquidation of Partnership/Subsequent Sale by Partners. A partnership's sole business has been to lease trucks and equipment to one corporation. All trucks and equipment leased were purchased tax paid to vendors and leased in substantially the same form as originally purchased. The partnership did not have a seller's permit since none was required. The partnership is comprised of three related individuals, A, B, and C. It is contemplated that the partnership will be terminated and its assets distributed to the partners in liquidation. Each partner will receive a 1/3 undivided interest in all the assets which consist entirely of the trucks and equipment. Upon liquidation of the partnership, partners B and C will sell each of their 1/3 undivided interests to individuals D and E.

A, D, and E will then form a new partnership and each will transfer his 1/3 interest in the trucks and equipment to the new partnership as a capital contribution. The new partnership will continue to engage solely in the business of leasing the trucks and equipment to the same corporation.

First, the termination of the partnership and the distribution of assets in liquidation to the partners will not occasion the application of tax because the transaction is not regarded as a "sale" under section 6006 since no consideration was received.

Second, the sale by partners B and C of their interests in the assets would be subject to tax to the extent that the assets include vehicles taxable under chapter 3.5 of the Sales and Use Tax Law. Assuming that partners B and C are not licensed or certified pursuant to the vehicle code or dealers, the applicable tax will be use tax payable by purchasers D and E. The measure of tax with the respect to the vehicles would be that portion of the total purchase price of the assets attributable to the transfer of the vehicle.

Third, the transfer by A, D, and E of assets to a new partnership as a capital contribution will not occasion the application of tax. Regulation 1595.

Fourth, the lease transaction between the new partnership and the corporation will be subject to tax to the extent that the items leased do not qualify as mobile transportation equipment. The tax will apply because the property will not be "tax paid" in the hands of the lessor, the new partnership. The new partnership will not have an election to place the nonmobile transportation assets on a "tax paid" basis since the assets would have been acquired in a tax free transaction. Further, the "tax paid" status would not carry over since the "transferor" would be A, D, and E as individuals and not the terminating partnership.

Fifth, to the extent that the new partnership is leasing mobile transportation equipment, these leases will not be regarded as sales and the tax will not apply. 8/16/76.