Ezel / Tax Rulings / TX
TX 200009941L Franchise Tax (PRIOR TO 01/01/2008) 2000-09-26

When a Delaware corporation converts into a Delaware LLC (and then an LP), is it the same entity for Texas franchise tax, and can the LLC use the corporation's business losses?

Short answer: It is treated as the same entity, and the LLC keeps the corporation's business losses. A Delaware C corporation converted under Delaware law to a Delaware LLC in April 2000, with the LLC set to convert to a Delaware LP on September 30, 2000. The Comptroller answered five questions: (1) the LLC is treated as the same legal entity as the C corporation for franchise-tax reporting; (2) the requirement to terminate a Texas certificate of authority when a foreign corporation changes form has no relevance for reporting here - the C corporation will not owe a final report and the LLC will not have to file an initial report; (3) the LLC's extension to file the 2000 annual franchise tax report was valid if the requirements of Tax Code Sec. 171.202 are met; (4) the LLC may recognize Texas business losses based on the C corporation's activities; and (5) the LLC will be able to use any business loss reflected in its 2000 annual report when it files its final report, to the extent it has net taxable earned surplus. The responses are based on the facts presented.

Apply this to your situation

This page answers the general question as of 2000. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 2000
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. This letter applies the pre-2008 Texas franchise tax and its taxable-earned-surplus business-loss rules, which the 2007 legislation (House Bill 3 and House Bill 3928) replaced with the current margin tax effective January 1, 2008; the margin tax treats entity conversions, reporting, and losses under its own rules, so confirm current law. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

A Delaware C corporation converted under Delaware law to a Delaware LLC in April 2000, and the LLC was set to convert again to a Delaware LP on September 30, 2000. The taxpayer asked five questions about the franchise-tax consequences. The Comptroller's short answers:

  1. Same entity? Yes - the LLC is treated as the same legal entity as the C corporation for franchise-tax reporting.
  2. Does terminating the Texas certificate of authority matter? No relevance for reporting here: the C corporation will not owe a final report, and the LLC will not have to file an initial report.
  3. Was the LLC's extension for the 2000 annual report valid? Yes, if the requirements of Tax Code Sec. 171.202 are met.
  4. May the LLC recognize Texas business losses from the C corporation's activities? Yes.
  5. Can the LLC use a 2000-report business loss on its final report? Yes, to the extent it has net taxable earned surplus.

The responses are based on the facts presented; different facts could change them.

Currency note: This 2000 letter applies the pre-2008 franchise tax and its earned-surplus business-loss rules (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The margin tax treats conversions, reporting, and losses under its own rules; confirm current law.

What this means for you

Businesses changing entity form (corporation to LLC to LP)

Under the old franchise tax, a conversion did not reset the taxpayer: the successor was the same entity, so there was no final report for the old form and no initial report for the new one, and the business's loss history carried through to the LLC. That continuity meant you did not lose accrued Texas business losses just because you changed legal form.

Tax professionals

The through-line is entity continuity: same entity for reporting, no final/initial report on conversion, and business losses follow the entity (usable on the final report to the extent of net taxable earned surplus). The extension's validity still hinged on satisfying Sec. 171.202. All pre-2008; re-verify conversion and loss treatment under the margin tax.

Common questions

Q: Is a converted Delaware corporation-to-LLC the same entity for Texas franchise tax?
A: Yes. The LLC is treated as the same legal entity as the C corporation for reporting purposes.

Q: Does the conversion trigger a final report and a new initial report?
A: No. The C corporation will not owe a final report and the LLC will not have to file an initial report.

Q: Can the LLC use the corporation's business losses?
A: Yes. It may recognize Texas business losses based on the corporation's activities, and can use a 2000-report loss on its final report to the extent of net taxable earned surplus.

Citations and references

Statute:

  • Texas Tax Code Sec. 171.202 - annual franchise tax report; the extension was valid if its requirements are met

Source

Original ruling text

September 26, 2000

XXXXXXXXXXX
XXXXXXXXXXX
XXXXXXXXXXX

Dear XXXXXXXXXXX:

Thank you for your letter concerning the franchise tax effects of a Delaware
conversion. You state that in April of 2000, a Delaware C Corporation ("C
Corp") converted under Delaware law to a Delaware Limited Liability Company
("LLC"), and LLC will convert to a Delaware Limited Partnership ("LP") on
September 30, 2000.

The following are your questions, followed by my response.

  1. Will the Comptroller treat LLC as the same legal entity for franchise tax
    reporting purposes as C Corp?

Answer: Yes.

  1. When a foreign corporation holding a Texas certificate of authority (COA)
    changes its organizational form because of a conversion, it is required to
    terminate its COA. What relevance, if any, does this termination requirement
    have for franchise tax purposes?

Answer: None for reporting purposes in this situation. C Corp will not owe a
final report and LLC will not have to file an initial report.

  1. Was LLC's extension to file the 2000 annual franchise tax report valid?

Answer: Yes, if the requirements of Texas Tax Code 171.202 are met.

  1. May LLC recognize Texas business losses based on C Corp's activities?

Answer: Yes.

  1. Will LLC be able to utilize any business loss reflected in its 2000 annual
    franchise tax report when LLC files its final report?

Answer: Yes, to the extent it has net taxable earned surplus.

These responses are based on the facts presented in your letter. If the facts
change or if there are additional relevant facts, the responses may change. If
you have any questions, please do not hesitate to write me or call me at
463-4662.

Sincerely,

Jerry Oxford
Tax Policy Division

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