In a limited partnership, is the corporate general partner subject to franchise tax, is a corporate limited partner subject, and how is an affiliate's administrative fee added back to earned surplus?

Plain-English summary

A taxpayer asked about the (pre-2008) Texas franchise-tax consequences of a limited partnership's activities in Texas and about an administrative fee paid within an affiliated group. The Comptroller answered:

1. General partner is subject. The limited partnership is doing business in Texas, so the corporate general partner is subject to the franchise tax.
2. Limited partner is not (for now). If a corporation's only Texas connection is being a limited partner in a limited partnership doing business in Texas, then under current policy it is not subject to either component. The Comptroller added a caveat: he did not agree the U.S. Constitution bars Texas from taxing such a limited partner, and Tax Code Section 171.001(c) directs Texas to tax to the constitutional limit — so this policy could change.
3. Officer-compensation add-back. A portion of the administrative fee must be added back to the taxable earned surplus of an affiliated corporation as compensation to officers and directors if the employees of the fee-charging entity (LTD) are officers or directors of that affiliated corporation.
4. Tracing / apportioning the add-back. If the administrative fee can be traced directly to activities performed by particular LTD employees, that tracing should be used. If not, the numerator is the wages of the LTD employees who are officers or directors of the affiliated corporation, and the denominator is the wages of all LTD employees whose activities gave rise to the administrative fee (with room to include other documented expenses).

The Comptroller cautioned that the responses rested on the facts presented and could change if the facts changed.

Important currency note: STAR marks this document partially superseded on 12/15/2014 on the taxation of partnerships. The 2007 legislation (House Bills 3 and 3928) restructured the franchise tax into the current margin tax effective January 1, 2008 and made partnerships subject to the tax, so the entity-level results here are historical. Confirm current law.

What this means for you

Groups operating through limited partnerships

Before 2008, the tax reached the corporate general partner of a Texas-active limited partnership, while a corporate limited partner with no other Texas contact stayed out — but the Comptroller openly signaled that limited-partner exclusion might not last. The margin tax later changed the entity-level picture.

Accountants and tax professionals

Note the officer/director compensation add-back mechanics for intercompany administrative fees, including the trace-first, then wage-ratio apportionment method. These earned-surplus add-back rules are specific to the pre-2008 tax; re-verify under the margin tax's compensation and combined-reporting rules.

Common questions

Q: Was the corporate general partner subject to Texas franchise tax?
A: Yes, because the limited partnership was doing business in Texas.

Q: Was a corporate limited partner subject?
A: Not under the policy at the time, if being a limited partner was its only Texas connection — but the Comptroller warned that policy could change under Tax Code Section 171.001(c).

Q: How much of the administrative fee was added back to earned surplus?
A: The portion attributable to LTD employees who were officers or directors of the affiliated corporation — traced directly if possible, otherwise apportioned by a wage ratio.

Citations and references

Statutes and rules:

• Tex. Tax Code Sec. 171.001(c) (Texas imposes the franchise tax to the limits of the U.S. Constitution)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9212L1229A01

Original ruling text

STAR SUPERSED INFORMATION
Accession No. —
Supersede type - Partial
Document superseded on - 12/15/14
Issue(s) that caused the document to be superseded — Taxation of partnerships
Reason(s): The Franchise Tax Code was amended by House Bill 3 and House Bill 3928,
Acts 2007, 80th Legislative Session, effective January 1, 2008 and affected Franchise
tax reports due on or after January 1, 2008. One of the many changes to this Tax Code
subjected partnerships (previously not required to file) to the franchise tax reporting
requirement.

December 23, 1992

Dear **:

Thank you for your letter dated December 4, 1992, asking questions about
the franchise tax consequences of a limited partnership's activities in Texas.

1. The limited partnership would be doing business in Texas for Texas
   franchise tax purposes. Thus, the corporate general partner will be subject to
   franchise tax.

2. If S's only connection with Texas is that it is a limited partner in a
   limited partnership doing business in Texas, then it is our current policy that
   S would not be subject to either component of the franchise tax. I would
   disagree, however, that Texas is prohibited by the United States Constitution
   from taxing a limited partner in a limited partnership doing business in Texas
   and Texas Tax Code section 171.001(c) states that Texas should tax to the
   constitutional limit. Therefore, I think it is possible that our policy in this
   area could change in the future.

3. A portion of the administrative fee must be added back to the taxable earned
   surplus of an affiliated corporation as compensation to officers and directors
   if the employees of LTD are officers or directors of such affiliated corporation.

4. If the administrative fee can be traced directly to certain activities
   performed by certain LTD employees, then that should be done. If this can not
   be done, then I agree that the numerator should be the wages of the employees
   of LTD that are officers or directors of the affiliated corporation, but I would
   think the denominator should be the wages of all LTD employees whose activities
   gave rise to the administrative fee. If you could show that other expenses were
   incurred which should be included in the denominator, then we would certainly
   be willing to consider those expenses, too.

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
toll free at 1-800-252-5555, extension 34662.

Sincerely,

Jerry Oxford
Tax Administration