Does a joint ownership agreement, where a nominee holds legal title to real property for five co-owners, create a separate entity subject to Texas franchise (margin) tax?

Plain-English summary

Five co-owners (all legal entities, not individuals) held an interest in Texas real property through a joint ownership agreement (JOA), with legal title conveyed to a nominee/agent entity acting purely for their convenience. The JOA explicitly stated it was not intended to create a partnership, association, or joint venture, and the co-owners had elected out of federal partnership tax treatment under IRC § 761(a) starting in 2009. Filings were quiet for years (no-tax-due reports 2010-2016) until a 2018 partial sale of the property raised the question of whether the nominee arrangement was a Texas franchise tax "taxable entity" at all.

The Comptroller ruled it was not a taxable entity, for two independent reasons:

1. It's a nominee, not an entity. Under case law, a nominee is someone who holds bare legal title to property for the benefit of another — not itself a legal entity subject to tax. The Texas franchise tax statute doesn't list "nominee" as a taxable entity type.
2. It's not a partnership or joint venture either. A joint venture requires a partnership engaged in ongoing joint prosecution of a transaction for mutual profit — but this JOA facilitates only shared private ownership of land with no ongoing business activity, and the JOA itself disclaims partnership/joint-venture intent. The co-owners also aren't a passive entity (which requires being a partnership or non-business trust) since they're not that either.

The ruling notes the co-ownership didn't independently qualify for the statutory exclusion covering operating agreements that elect out of federal partnership treatment (Treas. Reg. § 1.761-2(a)(3)) — that exclusion applies to operating agreements, and this was an ownership agreement — but that distinction didn't matter here since the arrangement failed to meet the joint-venture/partnership definition on its own terms anyway. The Comptroller also flagged that if the arrangement's facts changed and it became a taxable entity, it would then be subject to tax and reporting requirements.

What this means for you

Co-owners of Texas real property using a nominee or title-holding arrangement

If your arrangement is purely about holding and sharing ownership of property — with a nominee holding title for convenience, no ongoing joint business activity, and no partnership intended or created — this ruling supports treating the arrangement itself as outside Texas franchise tax. But watch for changes: an active sale or ongoing joint business use of the property could shift the analysis, as the ruling itself notes.

Compare against the contrasting joint-venture ruling in this corpus

This ruling is a useful counterpoint to STAR Accession No. 202106021L (also in this corpus), where a hospital district's revenue-sharing arrangement with radiologists — despite similar contract language disclaiming partnership/joint-venture intent — WAS found to be a taxable joint venture. The difference: that arrangement had ongoing shared business activity (a real revenue-sharing formula, joint management authority, and equipment funding), while this property co-ownership had no ongoing business, just passive shared ownership.

Accountants and tax professionals

Note the two independent grounds here — nominee status alone, and separately failing the joint-venture/partnership test — either of which would support the "not a taxable entity" conclusion. The Comptroller's explicit caveat that the entity could become taxable if facts change (e.g., ongoing business activity develops) is worth flagging to clients with similar arrangements.

Common questions

Q: Does simply calling an arrangement a "nominee" or "agent" relationship automatically avoid Texas franchise tax?
A: Not automatically — but here, both the nominee's lack of independent entity status AND the underlying co-ownership's lack of ongoing joint business activity supported the same conclusion. A nominee holding title for an actively-operating joint venture could come out differently.

Q: Would this analysis change if the co-owners started actively operating a joint business using the property?
A: Likely yes — the ruling explicitly notes that if the arrangement becomes a taxable entity under the statute, it would then be subject to tax and reporting requirements. Compare the contrasting hospital-district/radiologist joint venture ruling (STAR 202106021L) in this corpus, where ongoing shared business activity was the key factor that DID create a taxable joint venture.

Q: Can other co-ownership arrangements rely on this ruling directly?
A: Not automatically — a private letter ruling binds the Comptroller only for the specific taxpayer and facts described. Arrangements with different features (ongoing business activity, different title-holding structure) should get their own guidance.

Citations and references

Statutes and rules:

• Tex. Tax Code § 171.001 (Tax Imposed)
• Tex. Tax Code § 171.0002 (Definition of a Taxable Entity)
• Tex. Tax Code § 171.0003(a)(1) (passive entity definition)
• 26 U.S.C. § 761(a) (election out of federal partnership treatment)
• Treas. Reg. § 1.761-2(a)(3) (requirements for electing out of partnership treatment)
• 34 Tex. Admin. Code Rule 3.581(b)(15) (Margin: Taxable and Nontaxable Entities — partnership defined)
• 34 Tex. Admin. Code Rule 3.581(c)(10) (Margin: Taxable and Nontaxable Entities — joint venture defined)
• Tex. Bus. Orgs. Code § 152.051 (Partnership Defined)

Cited case law:

• Fourth Inv. LP v. United States, 720 F.3d 1058, 1066 (9th Cir. 2012) (defining a nominee as one who holds bare legal title to property for the benefit of another)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MAR
• Opinion: https://star.comptroller.texas.gov/view/201902008L

Original ruling text

February 13, 2019

RE: Private Letter Ruling No. 20181022091128

**, Trustee #2, Taxpayer No. **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your request dated Oct. 16, 2018. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance regarding whether a joint ownership agreement (JOA) creates a taxable entity for Texas franchise tax purposes.

Facts Presented

The relevant facts are based on the documents provided in the private letter ruling request and additional research performed by Tax Policy.

INDIVIDUAL, Trustee, acquired an interest in real property in Texas and conveyed legal title of the property to **, Trustee #2 (Taxpayer), as agent for five co-owners through the JOA.

The JOA was executed to facilitate the management of the property and related expenses. The JOA states that Taxpayer is a “nominee, agent and attorney-in-fact for convenience only.”

The five co-owners consist of legal entities and are not natural persons. For federal tax purposes, the activity related to the property is reported on Internal Revenue Service Form 1065 for partnerships. Beginning with its taxable year 2009 Taxpayer made an election to be excluded from federal partnership treatment under Internal Revenue Code (IRC) 761(a) and Treas. Regulations 1.761-2(a)(3).

For the report years 2008 and 2009, Taxpayer filed franchise tax reports after receiving a delinquency notice and subsequently filed no tax due franchise tax reports for the report years 2010-2016. In report year 2018, there was a sale of a portion of the property, resulting in a possible franchise tax liability. The JOA is intended to facilitate the shared private ownership of the land and does not conduct any ongoing business. The JOA expressly states that, “This Agreement is not intended and shall not be construed to create a partnership association or joint venture…” The JOA also provides that “Each Owner further agrees to pay its pro rata portion of all standby fees, taxes, assessments, insurance premiums and other costs and expenses incurred in connection with the ownership of the Property.”

Question, Ruling, and Analysis

A restatement of your question is shown below, followed by our response and analysis.

Question: Is Taxpayer’s co-ownership arrangement a taxable entity under Texas Tax Code Section 171.0002?

Ruling: Taxpayer’s co-ownership arrangement is not a taxable entity described in Section 171.0002.

Analysis:

Franchise tax applies to each taxable entity doing business in Texas or organized in Texas. Section 171.001 (Tax Imposed). Section 171.0002 (Definition of a Taxable Entity) identifies all entities that are considered “taxable entities” and specifically includes “joint venture.”

The Texas Tax Code does not provide a definition of a nominee. However, case law provides that a nominee is one who holds legal title to property for the benefit of another. Fourth Inv. LP v. United States, 720 F.3d 1058, 1066 (9th Cir. 2012) (holding that a “nominee is one who holds bare legal title to property for the benefit of another”). A nominee is not a legal entity.

Under Section 171.0002 (Definition of Taxable Entity), a joint venture is a taxable entity and does not include a co-ownership that meets the requirements of Treasury Regulation 1.761-2(a)(3). Treasury Regulation 1.761-2(a)(3) pertains to organizations that function under operating agreements, unlike Taxpayer who is operating under an ownership agreement. Under Rule 3.581(c)(10) joint ventures are defined as “A partnership engaged in the joint prosecution of a particular transaction for mutual profit.”

Partnerships are taxable entities under Section 171.0002 and are defined under Rule 3.581(b)(15) (Margin: Taxable and Nontaxable Entities) as “A relationship referred to in Business Organizations Code, Section 152.051, and Revised Partnership Act, Article 6132- 2.02.”

Under the Texas Business and Organizations Code Section 152.051 (Partnership Defined), “an association of two or more persons to carry on a business for profit as owners creates a partnership...”

An entity qualifies as a passive entity under Section 171.0003(a)(1) only if it is a general or limited partnership or trust other than a business trust. Taxpayer is not a general or limited partnership or a trust; therefore, it does not meet the definition of a passive entity.

Under the JOA, Taxpayer is the nominee, which only holds legal title to property for the benefit of another. A nominee is not expressly identified as a taxable entity in the Texas Tax Code or Texas franchise tax rules. Taxpayer does not fall within the joint venture exclusion under Treasury Regulation 1.761-2(a)(3) concerning operating agreements, because Taxpayer has a joint ownership agreement not a joint operating agreement.

Taxpayer’s entity is not a partnership as the JOA states that the parties did not intend for the ownership arrangement to create a partnership or trust. In addition, Taxpayer does not meet the definition of joint venture, because it does not have ongoing business transactions.

Taxpayer’s organization is not a taxable entity enumerated in Section 171.0002 and is not a passive entity included in Section 171.0003. However, if for any reason Taxpayer’s entity becomes a taxable entity as defined by the Texas franchise tax statutes, it would then be subject to tax and reporting requirements.

The Texas Tax Code and Texas Administrative Code are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20181022091128.

Sincerely,

Tax Policy Division – Direct Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

[1] Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.