If an out-of-state pension fund invests in Alabama only as a limited partner — and registers as a foreign corporation just to make its contracts enforceable — is it 'doing business' so as to owe Alabama franchise and income tax?

Plain-English summary

Entity A — an out-of-state public-school retirement fund, organized under its home state's statute as a trust (though the statute gives its board "all the powers and privileges of a corporation") — planned to invest about $64,350,000 in Alabama, with up to $30 million more later for expansion. The money would flow through a tiered limited-partnership structure ending in Company B (a Delaware LP) that owns the mall section of an Alabama shopping center. Entity A's role was as a limited partner in one of the partnerships (Company D). To make its Alabama contracts enforceable, Entity A planned to register ("qualify") as a foreign corporation in Alabama, even though it argued it is not a corporation and not "doing business" here. It asked whether that triggers Alabama foreign franchise tax and income tax.

Is it a "corporation"? Yes — but that's not the end. The Department noted Alabama's constitution defines "corporation" very broadly: Ala. Const. Art. XII, § 241 includes any association "having any of the powers or privileges of a corporation." Because Entity A's enabling statute grants it corporate powers, it is a corporation under Alabama law.

Franchise tax — no. Under § 40-14-41, a foreign corporation owes Alabama franchise tax only if it is "doing business" in the State. Qualifying to do business is prima facie (but not conclusive) evidence of doing business — and here that presumption is overridden by § 10-2A-23, which provides that participating as a limited partner is not "doing business." So Entity A's limited-partner investment, even paired with foreign-corporation qualification (§ 10-2A-226), does not subject it to franchise tax.

Income tax — no. As a limited partner in Company D, Entity A would ordinarily have to include its distributive share of the partnership's income (which flows up from Company B). But Entity A gave the Department an IRS determination letter showing it is an entity described in IRC § 401(a) (a qualified pension trust), and Ala. Code § 40-18-25(e) exempts § 401(a) entities from Alabama income tax. So its distributive share of the Alabama investment income is exempt.

Rulings: (1) Entity A is not "doing business" in Alabama and is not subject to foreign franchise tax under § 40-14-41; mere qualification doesn't change that, because § 10-2A-23 says limited-partner participation isn't doing business. (2) Any income Entity A receives from the Alabama investment is exempt from Alabama income tax under § 40-18-25(e).

What this means for you

A pure limited-partner stake generally isn't franchise-tax nexus

Alabama's foreign franchise tax reaches corporations "doing business" in the State. Under § 10-2A-23, holding an interest only as a limited partner is not "doing business" — so a passive limited-partner investment (even in Alabama real estate) doesn't by itself create franchise-tax liability, and simply registering to do business doesn't override that.

Registering to qualify ≠ conceding you're taxable

Entity A qualified as a foreign corporation just to make its contracts enforceable. The ruling confirms that qualification is only prima facie evidence of doing business, rebuttable on the facts — so a defensive registration need not, by itself, trigger the tax.

Federal § 401(a) status carries into Alabama income tax

If your entity has an IRS determination that it is described in IRC § 401(a), Ala. Code § 40-18-25(e) exempts it from Alabama income tax — including its flow-through distributive share from partnership investments. Keep the determination letter handy; the Department relied on it here.

Entity classification can differ by law

Entity A was a trust at home but a corporation under Alabama's broad constitutional definition — yet still untaxed here because of the limited-partner and § 401(a) rules. Don't assume one label controls; the tax result depends on the specific statutes.

One taxpayer, one structure

Under § 40-2A-5 this ruling is not precedent and binds the Department only as to Entity A's facts and its specific tiered-partnership structure. General-partner roles, other activities, or non-§401(a) investors can change the answer.

Common questions

Q: Does investing in Alabama as a limited partner create franchise-tax liability for an out-of-state entity?
A: Not by itself. Under § 10-2A-23, participating solely as a limited partner is not "doing business," so § 40-14-41 franchise tax doesn't apply — even if the entity qualifies as a foreign corporation.

Q: Does registering as a foreign corporation mean you're "doing business"?
A: It's only prima facie evidence, not conclusive. Here the limited-partner rule in § 10-2A-23 rebutted the presumption, so qualification alone didn't trigger the tax.

Q: Is the entity's share of Alabama partnership income taxable?
A: Not here. Because Entity A is an IRC § 401(a) entity, Ala. Code § 40-18-25(e) exempts it from Alabama income tax on its distributive share.

Q: Can I rely on this ruling?
A: No. Ala. Code § 40-2A-5 makes revenue rulings non-precedential; this one is limited to Entity A's facts.

Citations and references

Constitution, statutes, and code:

• Ala. Const. 1901, Art. XII, § 241 — defines "corporation" to include associations having corporate powers
• Ala. Code 1975 § 40-14-41 — foreign franchise tax requires "doing business"; qualification is only prima facie evidence
• Ala. Code 1975 § 10-2A-23 — participation as a limited partner is not "doing business"
• Ala. Code 1975 § 10-2A-226 — qualification of a foreign corporation to do business in Alabama
• Ala. Code 1975 § 40-18-25(e) — Alabama income tax exemption for entities qualified under IRC § 401(a)
• Internal Revenue Code § 401(a) — qualified pension trust
• Ala. Code 1975 § 40-2A-5 — revenue rulings are not to be used or cited as precedent

Source

• Landing page: Alabama Department of Revenue -- Revenue Rulings
• Original PDF: https://www.revenue.alabama.gov/wp-content/uploads/2022/06/2017_05_RR-94-001.pdf

Original ruling text

State of Alabama
Department of Revenue

Montgomery, Alabama 36132 GEORGE E. MINGLEDORFF Il!
= Assistant Commissioner
GEORGE E. MINGLEDORFF fil LEWIS A. EASTERLY
Commissioner Acting} Secretary

ALABAMA DEPARTMENT OF REVENUE
REVENUE RULING 94-001

This document may not be used or cited as precedent. Code of
Alabama 1975, §40-2A-5(a).

TO:

FROM: Commissioner of Revenue
Alabama Department of Revenue

DATE: February 17, 1994

SUBJECT: Financial Investment in Alabama by a Foreign
Corporation as a Limited Partner is not an Activity so
as to subject the Corporation to Alabama Franchise and
Income Taxes

FACTS

Entity A is a state retirement fund organized pursuant to
its State statute. Pursuant to the statute which creates the
Board which administers the State Retirement Fund, it possesses
all the “powers and privileges of a corporation.” Nevertheless,
Entity A is not a corporation under the laws of its State but,
instead, acts as a trust which holds and invests pension fund
monies with respect to certain public school employees.

Entity A proposes to make an initial equity investment in
Alabama of approximately $64,350,000. . The form of the
investment will be through a limited partnership. The structure
is very complex. Company B, a Delaware limited partnership,
will be formed to acquire the mall section of a shopping center
in Alabama. Company C will be the general partner of that
entity. The limited partner of the entity will be Company D, a
Delaware limited partnership. The general partner of Company D
will be Company E, an Illinois limited partnership. The limited
partner of Company D will be Entity A.

The limited partner of Company E— is Company F, an Illinois
limited partnership. The general partner of Company E is
Company G, an Illinois corporation. In the aggregate, Company G
and Company F will contribute to _ the capital of Company E
$650,000. That $650,000 will, in turn, be contributed by
Company E to Company D, as_ the capital contribution of the
general partner. Entity A will contribute, as a limited partner

of Company D, $64,350,000 to the capital of Company D. Company
D will contribute to Company B in the aggregate ¢65,000,000 and
Company C will contribute to Company B the mall section of the
shopping center in Alabama.

In addition, Entity A contemplates investing up to an
additional $30 million as a limited partner in Company D which,
in turn, will be contributed to Company B, as a result of
certain proposed capital improvements. In the event = such
capital improvements are made, the shopping center will be
expanded by approximately 76,000 square feet.

Even though Entity A contends that it is not a corporation
under the laws of its State and that it is not "doing business"
in Alabama pursuant to its limited partnership investment,
Entity A has decided to qualify to do business as a foreign
corporation due to the fact that the statute creating Entity A
provides that the Fund “possesses powers of a corporation."
Therefore, if Entity A goes through with the above transaction,
it intends to qualify to do business as a foreign corporation in
Alabama so as to render any contracts enforceable within this

State.

ISSUES

(1) Whether the above proposed expenditures and
qualification to do business as a foreign corporation
subjects Entity A to Alabama's foreign franchise tax
under Alabama Code, §40-14-413

(2) Whether Entity A would be subject to Alabama income
tax so as to require Entity A, as a limited partner in
Company D, to include in taxable income its
distributive share of the income of that partnership
which, in turn, would be required to include in income
its distributive share of the income of Company B.

LAW _ AND ANALYSIS

Entity A intends to qualify as a foreign corporation in the
State of Alabama due to the fact that its enabling statute
grants Entity A the "power and privileges of a corporation™ even
though it is clear from the State statute that Entity A
functions as a trust. Its investment powers are defined by the
trust laws of its state and even though the Fund will qualify to
do business in Alabama, it is not a corporation under its State.

Article XII of the Constitution of Alabama of 1901
pertains to corporations. Specifically, §241 defines
"corporation" to include all joint stock companies, and all
associations having any of the powers or privileges of a

corporation, not possessed by individuals or partnerships.
Based on that broad definition, the Fund is a corporation under
Alabama law due to the fact that the enabling statute grants
Entity A the power and privileges of a corporation.

The facts presented to the Department, however, reveal that
Entity A is not subject to Alabama foreign franchise tax even
though it intends to qualify as a foreign corporation pursuant
to Alabama Code 1975, §10-2A-226. Alabama Code 1975,
§40-14-41, provides that in order for a foreign corporation to
be subject to Alabama franchise tax, it must be "doing business"
within the State. While that same code section provides that
the mere act of qualification is prima facie evidence that
the entity is doing business, it is not a conclusive
presumption. This presumption is overridden in this situation
by Alabama Code, §10-2A-23, which provides that the
participation by a corporation as a limited partner is not the
act of "doing business” in Alabama.

As part of this requested Revenue Ruling, Entity A
requested a determination as to whether it would be subject to
Alabama income tax. Entity A, as a limited partner in Company
D, if not otherwise exempt from income tax, would be required to
include in taxable income its distributive share of the income
of that partnership, which, in turn, would be required to
include in income its distributive share of the income of
Company B.

As part of its Revenue Ruling request, Entity A_ has
provided the Department with a determination letter from the
Internal Revenue Service which states that Entity A constitutes
an entity that qualifies and is described in §40l(a) of the

Internal Revenue Code. Alabama Code 1975, §40-18-25(e),
exempts from Alabama income tax those entities qualified under
§401lCa). Accordingly, Entity A's distributive share of income

would not be subject to Alabama income tax.

RULINGS

Entity A contemplates making certain investments in Alabama
through various limited partnerships. These investments are to
be used for the acquisition and expansion of a shopping center
in Alabama. As part of its anticipated investments, Entity A
intends to qualify as a foreign corporation with the State of
Alabama. Entity A has also qualified under the Internal Revenue
Code as an entity described in §8401(a). Based on the above
analysis, the Department issues the following rulings:

(1) Entity A is not “doing business" in
Alabama for Alabama foreign franchise tax
purposes and is not subject to Alabama
Code 1975, §40-14-41. The mere fact

C2)

that Entity A is qualified to do business
within the State of Alabama does not
subject it to Alabama foreign franchise
tax by virtue of Alabama _ Code 1975,
§810-2A-23, as it is participating solely
as a limited partner;

Any income received by Entity A as a
result of its investment in Alabama will
be exempt from Alabama income tax
pursuant to Alabama Code 1975,
§40-18-25(e).

George E.

Mingledorff II

GEM: DES:eb379B