Is a political action committee (PAC) exempt under IRC Section 527 also exempt from Texas franchise tax?

Plain-English summary

A taxpayer asked whether a political action committee (PAC) that is exempt under Internal Revenue Code Section 527 is also exempt from the (pre-2008) Texas franchise tax. The Comptroller answered no.

• The tax applies broadly. Tax Code Sec. 171.001(a) imposes the franchise tax on every corporation and LLC that does business in Texas or is organized under Texas law.
• Exemptions are a closed list. Certain corporations may qualify for exemption only under Tax Code Sections 171.051 through 171.087. In particular, Section 171.063(b) exempts a corporation that is exempt under IRC Section 501(c)(2)-(8), (10), (16), (19), or (25).
• Section 527 is not on the list. Because a Section 527 political organization is not one of those referenced 501(c) categories, it does not qualify for the franchise-tax exemption.

Currency note: This is the pre-2008 franchise tax, replaced by the current margin tax under the 2007 legislation (House Bills 3 and 3928) effective January 1, 2008. Confirm current exemption rules for the margin tax separately; the specific cross-reference here is to the older statute.

What this means for you

Political committees and their advisors

Federal tax-exempt status under Section 527 does not carry over to the Texas franchise tax. A PAC organized as a corporation still had to look to the specific 501(c) categories in Sec. 171.063(b), and Section 527 is not among them.

Accountants and tax professionals

Franchise-tax exemption depends on matching an enumerated 501(c) subsection in Sec. 171.063(b), not on merely being federally tax-exempt. When a client's exemption rests on a Code section outside that list (such as 527), there is no franchise-tax exemption on that basis.

Common questions

Q: Our PAC is tax-exempt under IRC 527 - do we owe Texas franchise tax?
A: Under this letter, yes. Section 527 status does not qualify a political organization for the franchise-tax exemption, which is tied to specific 501(c) categories in Sec. 171.063(b).

Q: Which organizations do get the exemption?
A: Corporations exempt under IRC Section 501(c)(2)-(8), (10), (16), (19), or (25), per Tax Code Sec. 171.063(b).

Citations and references

Statutes:

• Tex. Tax Code Sec. 171.001(a) (franchise tax imposed on corporations and LLCs)
• Tex. Tax Code Secs. 171.051-171.087 (franchise-tax exemptions)
• Tex. Tax Code Sec. 171.063(b) (exemption tied to IRC 501(c)(2)-(8), (10), (16), (19), (25))
• IRC Section 527 (political organizations)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200503036L

Original ruling text

Date: March 9, 2005

To: **

Dear **:

Thank you for your Tax Help inquiry concerning Texas franchise tax.

You ask if a PAC, exempt under Internal Revenue Code (IRC) Section 527,
qualifies for exemption from franchise tax.

The statutes I mention below, as well as other related information, are
available online at http://www.window.state.tx.us/taxinfo/franchise/index.html.

Texas Tax Code Section 171.001(a) imposes a franchise tax on each corporation
and each limited liability company that does business in this state or that is
organized under the laws of this state. Certain corporations may qualify for
exemption from the franchise tax under Tax Code Sections 171.051 through
171.087. Section 171.063(b) specifically provides a franchise tax exemption
for a corporation exempted under Internal Revenue Code (IRC) Section 501(c)(2)
through (8), (10), (16), (19) or (25).

Based on the information provided, a political organization exempt under IRC
Section 527 does not qualify for exemption from the franchise tax.

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

Our goal is to provide you with prompt, professional service. Please take a
moment to complete our on-line survey at
http://aixtcp.cpa.state.tx.us/surveys/tpsurv/.

If you have questions about this, my internet address is
[email protected], or you may call toll-free at 1-800-531-5441,
extension 59952.

Sincerely,

Teresa Bostick
Tax Policy Division